Tags: Housing Market | Homes | Mortgages | Loans

Feds Realize They Destroyed Housing Market, Inch Toward Recovery

By    |   Friday, 24 October 2014 07:47 AM

After holding back the housing recovery for the past few years, regulators introduced new rules that will allow creditworthy borrowers to get a mortgage.

Banks make mortgages and then sell the loans to government-backed agencies. This allows banks to recover their funds quickly to make new loans.

In the wake of the housing crisis, Washington set rules requiring borrowers to make a 20 percent down payment. If the down payment was less than that, banks had to buy back part of any loans that defaulted in the future.

Obviously, these rules discouraged banks from making loans since they carried unlimited risks.

Buying back defaulted loans might sound reasonable, but banks are not being compensated for that risk unless they increase the costs of the loan.

A 20 percent down payment might also sound reasonable but few first time buyers will have that much money. Many homeowners who saw values drop in the past 10 years have too little equity to meet that requirement.

The predictable result of the rules has been a drop in home sales that has slowed the economic recovery.

After following this trend for the past few years, regulators announced last week that the government would drop its demand that banks buy back defaulted loans if sound underwriting practices are followed.

Under the new rules, buyers can make down payments of 3 percent. Banks will be required to verify income and ensure the debt to income ratio of a borrower is below 43 percent.

This is a positive step towards a normal housing market. There will not be an immediate boom in prices because buyers are conditioned to expect bargains.

At least now, they can obtain a loan when they find the right home at the right price.

This should allow prices to stabilize and eventually to grow slowly.

A return to the rapid gains of a decade ago seems unlikely to be repeated for many years.



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MichaelCarr
After holding back the housing recovery for the past few years, regulators introduced new rules that will allow creditworthy borrowers to get a mortgage.
Housing Market, Homes, Mortgages, Loans
320
2014-47-24
Friday, 24 October 2014 07:47 AM
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