In trying to stimulate the housing market, two parts of the federal government are working at cross purposes. The Federal Reserve keeps flushing in an effort to get liquidity flowing through the pipes of the economy, while an agency called FHFA keeps clogging them.
Yesterday the Fed announced another round of measures designed to depress long-term interest rates. This is the Fed's second round of quantitative easing, or QE2. Among other things, it's designed to push down on mortgage rates.
Ben Bernanke, the Fed's chairman, has an op-ed in today's Washington Post in which he explains his thinking. "Easier financial conditions will promote economic growth," he writes. "For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance."
This statement sounds hopelessly naive, if you have tried to qualify for a mortgage recently. The borrowing process is grueling nowadays. But Bernanke isn't naive. He concludes by writing: "The Federal Reserve cannot solve all the economy's problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators and the private sector."
When Bernanke mentions regulators, I hope he means FHFA, the Federal Housing Finance Agency. That's the government body that oversees Fannie Mae and Freddie Mac while they're in conservatorship. If you wonder why your lender has unreasonable demands regarding paperwork and appraisals, you should lay much of the blame on FHFA (pronounced "FUH-fa").
You know the saying that, uh, "stuff" flows downhill? In this case, "it" is excreted by FHFA and ends up plopping on the borrower's head. Fannie, Freddie, banks, appraisers and others get smeared by the stinky stuff, too, as it flows downhill.
It's time-consuming and frustrating to get a mortgage today because lenders are afraid of loan buybacks. When you get a mortgage, the lender sells it to Fannie Mae or Freddie Mac. Fannie and Freddie then pick through the paperwork on the loans they bought, hunting for anomalies. Did the borrower sign on the wrong dotted line? Did a photocopy of a checking account statement exclude the last page, which was nothing but an ad for credit cards? Fannie/Freddie make the lender buy the loan back.
This policy comes from the top of the hill. If FHFA wanted Fannie/Freddie to stop being so picky, the agency would tell them to stop.
The lender loses money when it is forced to buy back a mortgage. That's not only the bank's problem; it's our problem, too. Each dollar that the lender spends to buy back a loan is a dollar that it can't lend to someone like you.
We got into the housing mess because lending standards were too loose. So standards were tightened up. Now lending standards are too strict to lead us out of this crisis. FHFA needs to stop filling and start flushing.