Subprime Reforms to Have Slight Market Impact

Tighter underwriting standards on subprime loans will have a short-term impact on the housing market, says the NATIONAL ASSOCIATION OF REALTORS®. However, that impact will be softened if Congress enacts legislation to expand the roles of Fannie Mae, Freddie Mac, and the Federal Housing Administration. The legislation would provide more housing opportunities to families that have low incomes or live in pricey metropolitan areas, NAR says. NAR praised the House Financial Services Committee Thursday for approving a bill to reform government-sponsored enterprises (GSEs).

The bill would overhaul the regulatory structure for the nation’s housing finance GSEs that include Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. The legislation now moves to the full House of Representatives for approval.Slight Sales Drop ExpectedDavid Lereah, NAR’s chief economist, predicts that tighter underwriting practices may cause total home sales to fall by about 100,000 to 250,000 nationally, or no more than 3 percent a year over the next two years. “Foreclosures are increasing inventories in certain local markets,” Lereah says. “The projected flood of foreclosures are problematic and will add to the already loose housing supply in some local markets, but these local markets are exhibiting healthy economic activity, enabling them to be able to absorb increases in foreclosures."Lereah says more households will wait to make a purchase until they have a stronger financial base and can afford a down payment, he says.

These households may seek mortgage loans from a revitalized FHA, from lenders making loans that meet Fannie Mae and Freddie Mac standards, and from other lenders offering affordable mortgage options to subprime borrowers, Lereah adds. Lereah: Don’t Overreact Subprime problems may be manageable, as they're occurring against a backdrop of cyclically low mortgage rates and a growing, healthy economy, where jobs and liquidity are plentiful in the marketplace, Lereah says.Therefore, Lereah warned against overreaction to the situation. “Tougher lending standards imposed by the marketplace and the regulators are necessary, but we need to be mindful of overcorrection,” he notes. “Responsible lending practices are what the doctor ordered, not practices that cause a credit crunch.”

NAR President Advocates for Reform NAR President Pat Vredevoogd Combs has led a campaign to modernize and revitalize the FHA mortgage insurance programs, providing subprime borrowers with a safe and affordable alternative to problematic loans and aiming to bring stability to the subprime market. “FHA mortgages can help meet the demand for subprime mortgages and help fill the gap in the mortgage market left by the decline of subprime and nontraditional products," Combs says. "A few simple changes can make a big difference."She says NAR supports increasing FHA loan limits, allowing risk-based pricing of mortgage insurance premiums, and reducing down payment requirements to reflect the current mortgage market.

What You Can Do Real estate practitioners can help, Combs says, by informing and guiding customers through the maze of financing alternatives so that homebuyers find mortgages that meet their needs. To assist with that, NAR brochures — which include some produced in conjunction with the Center for Responsible Lending — available include:

Specialty Mortgages: What are the Risks and Advantages?
Traditional Mortgages: Understanding Your Options
How to Avoid Predatory Lending
FHA Improvements Benefit You: FHA Insured Mortgages, which was created in partnership with the Federal Housing Administration and the U.S. Department of Housing and Urban Development.
All brochures are available online in the Housing Opportunities section of Realtor.org.