Now You'll Never Own A Home

With the government itching to gracefully back out of the clusterfuck that is the American consumer loan industry, home loans are poised to get a lot more expensive and a lot less accessible. Home ownership is going to go the way of supper club membership, and unless you’re a winsome red headed orphan whose pluck wins over a wealthy and soft-hearted benefactor, you might be stuck renting a lot longer than you’d hope.

During the Great Depression, programs to incentivize home ownership among middle class Americans began popping up. Companies that lent money to home buyers made themselves attractive to investors by guaranteeing to repay their investment even if borrowers defaulted. That guarantee was provided by Fannie Mae and Freddie Mac, and, by extension, the federal government. Thus, if home buyers didn’t pay back their loans, the people who would ultimately foot the bill were the American tax payers.

As the entire financial world collapsed into a fiery pile of smoking debris in 2007 and 2008, it became clear that Fannie and Freddie’s “the taxpayers totally have this, investors” design didn’t take into account the possibility that a large percentage of borrowers would fail to pay their lenders back simultaneously and that the taxpayers would end up being on the hook for an unmanageable amount of money. The agencies became insolvent weights around Uncle Sam’s neck

The federal government subsidized 90% of home loans made in the last year. On one hand, having home loans backed by government agencies allows the average American access to home loans cheap enough that they could actually afford them. On the other, the current system has proven itself unsustainable and fiscally dangerous. A new report released by the Obama administration is pretty damning of the government’s involvement in assuring that everyone has a ranch-style bungalow to call their own, and they want out, but they’re not sure how to extract themselves. The New York Times reports that there are currently three options being considered,

The first option would eliminate any government guarantee for middle-class mortgages.

Under the second option, the government would offer guarantees to investors mostly in times of financial distress, preserving a steady supply of loans but not reducing interest rates in good times.

The third option comes nearest to the current system. The government still would guarantee a broad range of mortgages, but only if lenders first purchased a guarantee from a private insurer. That would limit the government’s exposure – but also the effect on interest rates.

So what does this mean for you and me? For one thing, when the private sector takes over a large chunk of lending, loans are most likely going to get more expensive, because the risk of lending to consumers is going to be shouldered entirely by the financial institutions issuing the loans and the private agencies that insure those loans rather than by the United States government. These private lending institutions are also going to be more discerning about to whom they lend and under what terms they part with their money. The Great Housing Hullabaloo Of The Double Aughts has taught banks to be gun shy about having residential and commercial properties on their balance sheets (since, when you borrow money from the bank to buy a house, the bank is paying for the house and the bank owns it until you pay the bank back, and if you don’t pay the bank back, then the bank owns the house, which is not ideal for the bank, as banks like to have cash on hand). You might be required to put down a larger down payment on a property than you would have had to in the past. And, at the end of the day, a lot of us who may have owned property in a decade or so will be shut out of the home ownership market. Early 20’s financial tomfoolery like missing credit card or student loan payments can negatively effect your credit score in a way that prevents you from ever being eligible for a large enough loan to cover the cost of a property. If you went to graduate school or a Fancy Private University for undergrad and are already carrying a lot of education-related debt, it might take you even longer to be eligible for a home loan, even if you’re making your payments faithfully and on time. And the 30 year fixed rate mortgage that your parents are still chugging away on may disappear entirely. While taxpayers may not be on the hook for defaulted home loans after Freddie Mac and Fannie Mae reforms come to fruition, those same reforms may prevent the average taxpayer from ever owning a home.