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Mortgage lending standards sank into the gutters during the recent housing boom. That laxity also brought the lending industry to its knees with the housing bubble burst starting in 2007. Lenders all over the country have had to dramatically tighten their loan applicant requirements, which has led to a reduced number of home sales for the past few years.
Has this change simply been a swing of the pendulum standards, overcorrecting for the past failures and set to swing back to looser requirements a few years down the road? Not according to Fannie Mae Chief Executive Michael J. Williams. In a July speech before the Women in Housing organization, Williams made it clear he believes the new standards are the "new realism" which will be here for generations to come.
"A solid majority of renters assume it will be tougher for their kids to buy a home--and they're right, too," he said as quoted in the Wall Street Journal, basing his comments on the results of Fannie's national poll of Americans' views on housing and homeownership.
"Across the board, we see a much deeper understanding of how credit, income, job security and a down payment could stand in the way of buying a home," he said.
And he added, "This is all healthy. It means we have a good chance to put in place a sustainable housing recovery one with the right mix of owners and renters in this country."
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That statement would have been blasphemous during the subprime housing spree during the first half of the last decade. Then it almost seemed that homeownership was seen as a "right" for all Americans. There was encouragement from lenders as well as the government for all borrowers, especially low-income and poor-credit borrowers to jump into the game.
However, Fannie's Williams is right. It turns out that compassion and hope are not all it takes to make Americans into homeowners. It actually takes a stable, decent income and a pattern of good credit behavior. As it stands now mortgage borrowers have to wait longer and meet higher income and credit standards before being approved for funding. These rules are safer financially but they do mean that fewer Americans will realize the dream of homeownership.
It's unclear if the "new realism" will truly outlast the next economic boom, but at least Williams says his company is making it permanent for its own clients, lenders who want to sell their loans off in order to gain capital for new loans again.
"Step-by-step, we are putting in place a new foundation for our industry," he said. "It's a foundation based on the right lending standards and on a broad re-examination of what constitutes sensible risk."
And at this point, with Fannie and sister company Freddie Mac (both currently controlled by the government) backing more than 90 percent of new mortgage loans in the country, those standards may very stay put for the next several decades.
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