The government is offering cheaper mortgages to first-time homebuyers, a risky move that could pave the way for another financial crisis, a mortgage foreclosure lawyer told The Daily Caller News Foundation.
The new rules, announced by Fannie Mae and Freddie Mac last week, allow lenders to offer mortgages with minimum downpayment of 3 percent — down from 5 percent — and are an effort to make homes more affordable for first-time buyers and to boost the housing market.
Similar efforts to make houses more affordable for low-income buyers played a major role in the 2008 collapse of the housing market.
“I think it’s setting up the ability for another crisis to come,” Adam Deutsch, senior associate at New Jersey firm Denbeaux & Denbeaux Law told TheDCNF. “This is a push to try and spur growth to the housing market on a short term level, and it’s not having long term foresight for what type of riskiness put us into the crisis that we’re finally seeing the end of.”
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Federal officials have defended the decision, pointing out the new loans will be targeted to first-time home buyers with a strong credit history, and that the buyer’s will be required to purchase mortgage insurance and go through counseling.
“The new lending guidelines released today by Fannie Mae and Freddie Mac will enable creditworthy borrowers who can afford a mortgage, but lack the resources to pay a substantial down payment plus closing costs, to get a mortgage with 3 percent down,” FHFA Director Mel Watt said in a statement.
Focusing on a potential buyer’s credit could be dangerous, because it doesn’t take into account a person’s ability to absorb unexpected financial shocks, Deutsch told The DCNF. “If a homebuyer does not have the savings to deposit 5 percent of their home purchase, it is a safe assumption they will not have a savings contingency to cover unexpected costs of homeownership, such as a leaky roof or replacement water heater.”
Buying might not be the right financial decision for many of these buyers, Deutsch added, especially because it could trap young people who are increasingly mobile. With a down payment as little as 3 percent, young homeowners wanting to move for economic or employment reasons might be stuck with a home they can’t afford to sell.
“Because property values aren’t climbing, you can’t absorb the cost of selling at a deficit or covering those closing costs,” Deutsch said. “Then you’re not going to be able to move, and that has the potential to have other consequences on the economy.”
The new policy is intended to open the door to the market for more buyers, he said, but called it “an act of extreme risk for which the potential harms likely outweigh the benefits.”
“It doesn’t take into account the reality that people have problems saving,” he added.
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