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How to Get Mortgage Lending Moving Again

Brian Summerfield, REALTOR® Magazine

Why did a mortgage finance system that had endured for decades stall and then break down in 2008? And what’s required to get mortgage lending back on track?

Those were the central questions of the Mortgage Liquidity Symposium held yesterday afternoon at the Midyear Legislative Meetings & Trade Expo in Washington, D.C. Panelists representing the banking sector, government-sponsored enterprises, and advocacy organizations participated in the discussion.

Neither of those questions lends itself to an easy answer. The first is challenging because so many parties made mistakes that led to the meltdown, said David Stevens, the former FHA head who now serves as CEO of the Mortgage Bankers Association.

“Our entire industry made pathetically bad decisions,” he said. “We all participated in this mess that we got into.”

On the mortgage financing side, the short-term solution to the problem was getting as far away from the loose conditions of the previous decade as possible.

“As an industry, we had to get back to solid, sound underwriting — full documentation and verification of income and assets,” said Cara Heiden, co-president of Wells Fargo Home Mortgage.

“We’ve clearly improved the credit standards and credit policy,” said Michael Williams, CEO, Fannie Mae. “Now we’re pretty comfortable with the credit quality that we have.”

Other panelists expressed concern that the pendulum had swung too far in the direction of caution. “A lot of people are intimidated because they’ve heard how restricted and conservative lending is,” Heiden acknowledged. That fear, combined with lender recalcitrance, has restrained a recovery in housing.

Panelists identified the following conditions as necessary for a sustained resurgence in mortgage lending:

Economic confidence: To get lending back to normal, “there’s a level of confidence needed in the market more broadly,” Stevens said. That’s getting better, though, in part because of performance improvements in financial institutions’ assets. “That means the healing process is on its way,” said Doug Jones, consumer sales & institutional mortgage service executive at Bank of America Home Loan.

Job creation: “The key to the stability of the housing market is the stability of the jobs market,” said Marc Morial, CEO of the National Urban League. “A person without a job can’t afford anything. They can’t afford a mortgage and they can’t afford to rent.” While the private sector has been adding jobs in recent months, the unemployment rate is still well above what’s considered a full-employment level. And job insecurity and income stagnation have contributed to consumer anxiety.

Government support: Some kind of government backstop is needed to hold up mortgage lending in good times and bad. Although some have argued for a fully privatized mortgage market, that approach is untenable, said Martin Eakes, CEO of Self-Help/Center for Responsible Lending. He explained that their case is “premised on a private mortgage lending market that never existed,” at least not since 1934, when the Home Owners Loan Corp. (HOLC) was formed. Free-market advocates aren’t arguing that we “should go back to 1999. They’re arguing that we should go back to 1929,” Eakes said.

Renewed demand for homes: If consumers don’t want homes, they won’t take out mortgages. And Diana Olick, CNBC real estate reporter and moderator of the panel, noted that under-30 consumers don’t seem to be as interested in home ownership as their parents. However, Stevens dismissed this as a short-term aberration. “This is purely a result of instability and insecurity,” he said, and added if stabilization of home prices lasts and the price of renting rises, demand for home ownership will go up. Furthermore, research from Wells Fargo shows that 75 percent of Generation Y still wants the American Dream of home ownership, Heiden said.

All the panelists expressed confidence that the mortgage lending environment would improve over time, but they said it would likely operate somewhat differently from the system that persisted through the latter half of the 20th century.

“The reason this conversation is so important is that this is a remake in the housing architecture, one that we’re going to have to live with for a long time,” Morial said. “We have to think about what kind of nation, communities, and financial system we want to build for the 21st century.”