Lending in 2014 – The Squeeze Play on Consumers

Brace yourselves for an extremely tight lending environment in 2014 that will likely squeeze many qualified borrowers out of the housing market.With the trifecta of increased guarantee fees from Fannie Mae and Freddie Mac, loan limit reductions from FHA, and the new housing regulations going into effect, the scales of consumer protection have tipped well beyond protection and now lean toward prevention.

In recent weeks, Fannie and Freddie’s federal regulator has announced a series of ways to increase guarantee fees with the intent of crowding out the government sponsored enterprises and bringing in more private capital.Unfortunately by shocking the real estate finance system in this way, the government’s intentions actually hurt our fragile recovery and consumers will pay the ultimate price.

Reducing the GSEs’ share of the market by increasing guarantee fees is counter intuitive to most economic logic.In reality, the government will succeed in crowding out qualified borrowers and contribute nothing to housing market recovery.Under the new fee structure, a borrower seeking a 30-year fixed-rate mortgage with a credit score of 735 (considered a good score by most standards) and making a 10% downpayment, will end up paying the fees charged to the lender at 2% of the loan amount, up from .75%.The 2% fee could raise the mortgage rate between a quarter and half a point.Simply put, this qualified borrower will pay more than anticipated on their home or not obtain a loan at all because the GSEs will add costs to the borrower’s monthly mortgage payment.

Raising guarantee fees on the heels of FHA reducing loan limits couldn’t have been worse timing.In accordance with Congressional statute, HUD recently announced the reduction of FHA’s maximum loan limits.However, HUD also appears to have rebalanced the median home price index it uses, resulting in even larger reductions than expected in many areas.

The impact is greatest in markets that had the largest price declines.In short, fewer homes will be eligible for FHA loans in some of the hardest hit markets, effectively keeping first-time and lower to middle income families out of the marketplace.Independent of the expiration of the high-cost loan limits, more than 300 counties face reductions greater than 10 percent. In some counties the reduction in loan limits is over 50 percent.

Finally, let’s not forget the piling on of new regulations in 2014.Over the past two years, industry and consumer groups alike have continuously warned of the overlapping and over restrictive rules tightening credit for all but the wealthiest of borrowers.The qualified mortgage rule with the 43% debt-to-income ratio may have the most significant impact on the market.Only time will tell what the true effect of the rulemakings will be, but I’m willing to bet that it won’t be long into 2014 before our warnings are proven true.

The bottom line – this is the worst timing possible to institute additional fees on a fragile housing market.These sort of misguided economic shocks are counterproductive to recovering the marketplace.We must institute policies that will protect consumers, encourage common sense lending, allow qualified borrowers access to credit, and provide a competitive environment for all lenders in the marketplace.

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