Some trends fade and then return after a few decades or so, like bell bottoms and tie-dye. You probably have a few things in the back of your closet waiting patiently to become a hot new retro-style – whether that's good or bad for society in general.
Unfortunately, that's true for financial trends as well as clothing. Higher-risk mortgage lending is on the rise again as consumers stretch to overcome soaring home prices and tight credit requirements.
According to data from Inside Mortgage Finance as reported in the Wall Street Journal, approximately 30% of loans that were securitized by the government mortgage backers Fannie Mae and Freddie Mac went to homebuyers with debt-to-income (DTI) ratios of more than 43%. That's almost twice the amount of such loans issued in 2015.
Why does that matter? A 43% DTI is generally considered the upper limit for acceptable risk. Default risks increase with increasing DTI – and since Fannie and Freddie are government entities as of 2008, that risk is ultimately borne by taxpayers.
Lenders are typically caught in the middle between regulations designed to reduce risk and housing advocates who complain that these regulations reduce access to low-income borrowers. Of course, they do – regardless of how much we'd like everyone to own a home, not everyone can realistically afford to own one. Policymakers struggle with where to draw the line between affordability and risk. MoneyTips is happy to help you get free mortgage and refinance quotes from top lenders.
The original credit-tightening effort included some relief for low-income borrowers through the qualified mortgage "patch". Qualified mortgages establish the minimum guidelines for mortgage loans to be purchased and backed by the government, including the 43% DTI limit. The patch established an additional category of qualified loans for borrowers with DTIs greater than 43% but other positive factors mitigating risk.
The patch will expire for Fannie Mae and Freddie Mac at the beginning of 2021 – thus, homeowners on the edge of affordability are rushing to buy homes while they still qualify. The Urban Institute estimates that 3.3 million mortgages were originated under this exception between 2014 and 2018.
There's likely to be legislative and policy changes before the qualified mortgage patch expires, regardless of the results of the next election. Progressives argue that the government should continue backing risky mortgages and extend other programs to help low-income Americans afford homes. Conservatives argue that Fannie and Freddie have fully recovered financially and should be allowed to return to the private market.
Are we headed toward another housing crisis? Probably not – credit is still far tighter than it was during the creation of the housing bubble, and the securities appear to be properly assessed. Arguably, the housing crisis was triggered not by risky securities but the misrepresentation of them as safe investments. Still, given the government turbulence over the last two years, who can say for sure?
You can't prevent a future housing bubble, but you can decide not to contribute to one. Usually, there's at least one lender willing to lend you more mortgage funds than you can afford to pay back.
Be realistic about the size of home that you can afford and understand the amount of risk you're taking on if you choose to stretch your finances to meet requirements. Adjust your budget to account for your new expense streams. Don't forget the taxes and maintenance costs of homeownership that often take new homeowners by surprise.
Use good judgment before you decide to contribute to any returning trend, from risky housing loans to those 1980s legwarmers or parachute pants. All of those trends faded for a pretty good reason.
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