Covering Our Bases–And Our Backs

Yesterday, we discussed the effect Housing and Urban Development
Secretary Alphonso Jackson’s resignation could have on the pending housing legislation being considered by Congress.

Today, many news outlets–including the New York Times–are saying some of those proposals could hit the floor as soon as tomorrow.

For whatever reason, housing is a hot topic now among the nation’s changemakers. Maybe it’s the sinking economy; maybe it’s the recent news that construction spending fell yet again in February.

Or maybe it’s just a case of everyone getting fed up–including the Fed, which yesterday released an online map highlighting problem mortgage areas (which, as if reflecting the current housing industry dismay, on Wednesday wasn’t really working)–and deciding someone needed to take the ball and run with it.

The changes on the table involve help for homeowners–but they also include a number of safety measures for the future.

Consider, for example, Fannie Mae. Even as Fannie Mae and Freddie Mac work to prevent foreclosures with higher loan limits and an increased role in the industry, Fannie Mae announced yesterday it’s tightening its standards.

• Fannie Mae–which previously had no minimum credit score–will now require a minimum score of 580 for most individual loans it buys.

• The government-backed agency also said it will increase the post-foreclosure period needed for borrowers to
  "re-establish" their credit history from four to five years. However, it will allow shorter recovery times if borrowers can provide "documented extenuating circumstances" that caused
  the foreclosure.

It’s interesting that the agency is trying to halt foreclosures by offering more loans to more borrowers–but at the same time, it’s covering its back.

Expect more of that as the slump continues.

Just look at our nation’s banks. The way they’re reacting to the housing crisis is telling. Not only are they being stricter about lending–gone are the days when you could get a mortgage with little proof of income and little money in the bank–they’re also trying to protect their mortgage-based investments very carefully.

Federally chartered banks held more than $12 billion in foreclosed properties across the U.S. at the end of 2007–roughly 100
percent more than a year ago. About $6.6 billion of those are one- to four-unit
residential properties, Keith Leggett, senior
economist at the American Bankers Association, told the Chicago Tribune.

The banks don’t really want those homes, according to the article–the upkeep is an added expense and they’re banks, not real estate agents.

So why are the lenders holding on to those foreclosed homes? Because they don’t want vacant properties to tank home values in the neighborhoods they lend in, and because they think the market will turn around at some point, allowing them to sell the homes for a profit, the Trib says.

In short: They’re trying to deal with the housing slump by reducing the market impact of their foreclosed properties and maximizing their eventual sale price–by playing it as safe as possible.

And that kind of concern isn’t limited to the U.S. As the U.K. housing market sinks further, some lenders may halt subprime lending–including New York-based Lehman Brothers, which the Financial Times said Wednesday may no longer issue subprime loans from two of its British units.

Risk got us into this mortgage meltdown; so it makes sense caution would bail us out. But are being protective enough?