Obama Is Making a Last Stab Push to Help Loosen Mortgage Lending

(Bloomberg) -- President Barack Obama’s administration is renewing the call to help lower income borrowers get home loans while it still can.

In the final months of Obama’s tenure, U.S. Treasury Department officials are laying out how reform to government-controlled mortgage finance giants Fannie Mae and Freddie Mac must include ways to make housing more affordable. If Hillary Clinton wins, the effort could be a blueprint for how she tackles reform. On the other hand, if Donald Trump wins or the Republicans keep control of Congress, those efforts could be blocked because they’re seen as a step back to the risky lending that contributed to the housing bust.

The Obama administration’s housing push comes as the most recent data indicate the housing finance system still isn’t helping poorer borrowers. A preliminary report released last Friday from Fannie Mae and Freddie Mac’s overseer, the Federal Housing Finance Agency, shows the mortgage firms, which back more than 40 percent of all mortgages, once again failed to reach their targets for serving low income borrowers.

At the same time, the gap between white and minority borrowers has widened. About 5.5 percent of mortgages to buy homes in 2015 were to black borrowers, up slightly from 2014 but far below the peak of 8.7 percent in 2006, according to federal data. Lending to Hispanic white borrowers rose to 8.3 percent from 7.9 percent in 2014 compared to 11.7 percent in 2006.

Subsidizing Rates

In part to combat those numbers, FHFA Director Mel Watt said in a speech last Monday that he would direct the companies to launch pilots that increase mortgage access “safely and soundly, but hopefully also significantly” in 2017. And in a paper earlier this week, Treasury Counselor Antonio Weiss and Assistant Secretary for Economic Policy Karen Dynan laid out principles for housing-finance reform, highlighting affordable housing as the most fundamental priority.

To promote affordable housing, the Treasury paper calls for reform to include subsidization of riskier borrowers’ mortgage rates, a duty for the companies to serve underserved markets and extra money for trust funds to build affordable rentals.

The paper’s proposals are likely to be at the center of models considered by a Clinton administration, said Jim Parrott, who has advised her campaign on housing policy and is a consultant to financial institutions.

While Trump hasn’t outlined his policies on housing, the Republican party platform includes scaling back the government’s role in the housing market, clearing away “the jumble of subsidies and controls that complicate and distort home-buying,” and ending “lending quotas to specific groups.”

Stagnant Wages

Even if Clinton wins, she may encounter the same pushback Obama has in trying to spur lending among lower income borrowers from conservatives who are concerned those efforts could signal a return to risky lending. Banks have also increased their underwriting standards out of fear of penalties or being forced to buy back faulty mortgages.

Some mortgage lenders have also said that the government meddling with the mortgage market just ignores what’s really holding low-income borrowers back -- a low supply of starter homes for sale and stagnant wages.

“I believe it’s patently untrue that people are excluded from this process,’’ said Stanley Middleman, CEO of Freedom Mortgage Corp., which was the seventh-largest lender in the first half of the year. “There is tremendously subsidized lending in this country.’’

That doesn’t mean the government hasn’t tried. In 2014, the FHFA said it would allow Fannie Mae and Freddie Mac to again back mortgages with down payments of as little as three percent. Fannie Mae and Freddie Mac say that hundreds of lenders have adopted the programs, but that the loans are still a relatively tiny segment of the market. 

Fannie Mae and Freddie Mac don’t make loans. They buy them from lenders, wrap them into securities and guarantee the payment of principal and interest to investors.

Alternative Scores

More recently, banks such as Wells Fargo & Co. and Bank of America Corp. have launched iterations of the low-down-payment programs that the banks say are seeing quick growth. It remains to be seen whether the loans bring in new borrowers or merely shift loans from other government programs to Fannie Mae and Freddie Mac.

Last year, the FHFA also approved programs that let the companies count income from non-borrower household occupants, such as an extended family member, toward qualifying for a loan.

Now, the FHFA is considering allowing lenders to use alternative credit scores, rather than the standard FICO model the companies now require, to qualify borrowers in some cases. That could, in theory, capture more borrowers who don’t have traditional credit histories and can’t be scored with typical means.

Housing advocates continue to be frustrated by the lack of success.

Fannie Mae and Freddie Mac “have really backed away from the populations that need their help more than any others, and that’s those who are on the bottom rungs of the economic ladder,’’ said John Taylor, president of the National Community Reinvestment Coalition.

Taylor has called for Fannie Mae and Freddie Mac to remove additional fees for riskier borrowers that the mortgage companies levied after the crisis. So far, the FHFA has resisted that call.