Ed Pinto and Bill Isaac have a column in Friday’s Wall Street Journal that challenges the conventional thinking that looser credit is the answer to the housing and mortgage finance malaise, and it's worth every minute it takes to read it.
Pinto is resident fellow and Co-Director of the American Enterprise Institute’s International Center on Housing Risk. Isaac is a former chair of the FDIC, and founder of The Secura Group, which is now part of FTI Consulting.
Sales of existing homes in August were down 5.3% year-over-year. The housing lobby says credit is too tight. The commissioner of the Federal Housing Administration and the director of the Federal Housing Finance Agency (regulator of Fannie Mae and Freddie Mac ) have called for lenders to further loosen lending standards.
While the housing market needs a shot in the arm, the financial crisis in 2008 taught us the extreme danger that loose lending standards—poor underwriting, risky loans and government-backed credit expansion—pose to homeowners and the economy. We think there is another way.
For most of the past 50 years, U.S. housing policy has relied on ever looser underwriting standards in an attempt to lift homeownership and stimulate the economy. The focus has been on attracting more low- and moderate-income home buyers in an attempt to build wealth for these households. Yet the homeownership rate has changed little since 1960, while homes in the past half-century have proved to be highly volatile assets. This is particularly the case for lower-priced homes bought by low-income households with highly leveraged 30-year loans.
A better option is what we call the Wealth Building Home Loan—a 15-year, fully amortizing, fixed-rate loan that will build equity much faster than a 30-year mortgage. The WBHL concept was unveiled in early September by Mr. Pinto and his colleague at the American Enterprise Institute, Stephen Oliner. The market embraced the idea, and WBHL-style loans are already being originated and distributed by the Neighborhood Assistance Corp. of America (NACA), a national nonprofit based in Boston that works primarily with low- to moderate-income borrowers. Citigroup and Bank of America have signed on to fund NACA's 15-year mortgages.
Read the full column here.