June 11, 2014

Federal government agencies attempt to jump-start housing market by loosening standards

The federal government recently announced plans to make mortgage lending standards less stringent, hoping that doing so will help jump-start the housing market.

FHFA's new director gives first speech
Mel Watt recently became the latest director of the Federal Housing Finance Agency. During this first speech, he outlined various steps he will take to improve the housing market.

Thus far, Watt has eliminated plans to lessen the participation of Fannie Mae and Freddie Mac in the mortgage market, according to CBS News. He emphasized that going in a new direction could be hugely beneficial.

"I am well aware, and regularly express my belief, that conservatorship should never be viewed as permanent or as a desirable end state and that housing finance reform is necessary," Watt stated, the media outlet reported.

Watt wants to improve mortgage accessibility
The new head of the FHFA seems keen on making homeownership more accessible to everyday consumers. This might seem like a huge shift from the mindset that many lawmakers and government officials had just a few years ago, when they moved to constrain mortgage credit, according to The Wall Street Journal.

Many are skeptical of such efforts, and warn that making the lending environment less stringent could potentially fuel another sharp real estate boom and bust, the media outlet reported. However, some policymakers have expressed a different point of view, warning that the mortgage market is facing some challenges.

Investors have dwindling impact on housing market
In the last several years, investors have helped drive home price appreciation by snapping up properties that had discount prices. However, since real estate values have moved higher in a wide range of areas, these opportunities have been tougher to find.

Amid this situation, existing home sales have fallen during 7 out of the last 8 months, according to CBS News. March was the last time this key measure of activity dropped. During the month, these home sales were 7.5 percent lower than one year earlier.

As these transactions struggle, the FHFA has attempted to lure would-be homeowners back to the mortgage market, The Wall Street Journal reported. However, there is little evidence these efforts have succeeded in getting homebuyers to come back.

During a discussion held at the Brookings Institution in Washington, Watt noted the key role that these market participants play in the housing market, according to the news source. While some want to wind down Fannie Mae and Freddie Mac, Watt said that doing so without knowing that private investors would participate in housing once again "would be irresponsible."

If the various stakeholders actually do succeed in helping the housing market recover, this key development could help speed up the broader economic recovery. Stronger economic conditions should mean both stronger lending and also more robust loan sales.