Spanish philosopher George Santayana wrote, “Those who fail to learn from history are doomed to repeat it.” Some commentators argue that the Federal National Mortgage Association (Fannie Mae) and the Federal Home Mortgage Association (Freddie Mac) may be falling into the trap of not learning from history.
Fannie Mae and Freddie Mac have announced a new approach to mortgage lending that will provide access to home ownership for first-time borrowers. They will book mortgages with down payments as low as 3 percent of the price of home. Fannie Mae began the policy on December 13; Freddie Mac will delay until March 23.
Borrowers, however, have to meet “stringent” requirements to qualify, according to the two government-sponsored entities. They must have a credit score of at least 620 (scores range from 300-850). They must also agree to purchase private mortgage insurance and keep it in place until the loan is less than 80 percent of the value of the home. And they must provide full documentation of income, assets, and job status as well as undergo home ownership counseling.
This may not be prudent policy. Many experts attribute the housing market crash of 2007 to “subprime mortgages.” Congress, primarily through the leadership of Sen. Christopher Dodd and Rep. Barney Frank, pushed to make housing more affordable to low-and moderate-income families. Dodd was chairman of the Senate Finance Committee; Frank chaired the House Financial Services Committee.
Dodd and Frank encouraged banks to provide mortgage lending to marginally qualified individuals, requiring many to have a down payment of 5 percent or less of the value of their home. Fannie Mae and Freddie Mac purchased the loans, a large number of which went bad.
Rather than improving the status of low-and moderate-income Americans, the Dodd-Frank plan backfired. Families lost their homes to foreclosure as the housing market collapsed.
In addition to millions losing their homes, Fannie Mae and Freddie Mac were placed in conservatorship in September 2008. The Federal Housing Finance Agency was named as conservator. In 2012, shares of both agencies were delisted from the New York Stock Exchange.
The fear is that we are going down the same path as before and that history will repeat itself. We can only hope that this does not occur!
Wayne Curtis, former superintendent of Alabama banks, is a retired Troy University business school dean. Email him at firstname.lastname@example.org.