Feds come to the rescue of a housing meltdown


As the new year begins, continued speculation about the health of the housing market is tempered by calls from trade organizations for the government to be proactive in shoring up availability of loans, while the Government eyes tightening of the credit system, to protect consumers.

Lawrence Yun, Chief Economist for the National Association of Realtors, calls on the federal government to expand the price of purchase loans they will underwrite as conforming loans.  This will give mortgage lenders much needed comfort, as loans underwritten by Fannie Mae and its smaller sister government-sponsored entity, Freddie Mac, are implicitly guaranteed by the U.S.

overnment.  This could spur an increase in loan activity amid liquidity concerns in the credit sector.

Mr. Yun also believes the Federal Reserve should lower interest rates by an additional quarter point, to make purchasing a home more attractive to would-be buyers who are on the fence.  Lowering the cost of mortgages could entice prospective homeowners into the market, when compared to high area rents as an alternative.

In its effort to tighten risk factors, the Federal Reserve has proposed measures geared to protecting the consumer from predatory lending practices that have, in many cases, contributed to the current high foreclosure rates in low to middle income homeowners.

Under the proposed new guidelines, the Fed would require that borrowers receive written disclosure of fees earned by a mortgage broker. Once the borrower agrees to the fee, it would not increase, even if the loan amount rises.

In an industry loophole, mortgage service companies have been able to divert a borrowers payment on principal to cover late fees, thus incurring further penalties for the consumer, and making it appear as if subsequent payments were also insufficient.  Under the new provision, the mortgage servicing company would be required to immediately credit a borrowers account when payment is received, with no diversion to cover penalties. 

Further protection for homeowners would come in the form of a crackdown on appraisals.  While some homeowners may have been duped in the past on the value of their home purchase by inflated appraisals, the Fed measure would prohibit any misrepresentations on the value of homes.  The banks are likely to adopt this without federal action, as they seek to minimize their credit risk going forward.  The default crisis affecting bank liquidity is a natural stimulus to banks to carefully look at any new debt they undertake.  This will protect consumers from deflation in home values, while potentially driving prices down in some municipalities.  Listings reflecting pricing from the hot market valuations of the boom period will correct, reflecting current market values.

Additionally, lenders will be required to disclose all fees associated with the loan prior to the borrower locking in a loan.  Consumers will be empowered to sue lenders if any of the new proposals are enacted into law in the new Congressional session in 2008.

With the market removing assessable risk from consumers purchase concerns, the New Year should provide a solid ground for stable growth in the housing market especially when sellers complement the market initiatives with realistic listing prices.

Jeni Upchurch is a former Assistant Secretary, U.S. Department of Housing & Urban Development.  She is a full-service realtor with McEnearney Associates Old Town office and can be reached directly at 571-216-6701.