Most people who want to buy a home don’t have the cash on hand to buy one. So, they borrow money from a bank and pay it back with interest, usually over 30 years. But to borrow money, one must make enough money to repay the mortgage and meet other living expenses. If he or she doesn’t make enough to cover the mortgage payments and daily expenses, he or she risks defaulting on the mortgage payments, something that costs banks money. Consequently, banks apply standards to determine if borrowers have the financial wherewithal to repay the mortgage. Obviously, not everyone does.
But the story doesn’t end there. Government tries to help those who can’t meet the banks’ standards, at least indirectly, by sharing, and consequently minimizing, the risk banks incur when lending money to people who don’t otherwise qualify for a mortgage. “The federal government guaranteed about 87% of new mortgage loans last year through Fannie Mae and Freddie Mac [the popular names of two government-chartered corporations] and the Federal Housing Administration, effectively setting the terms and providing the money for nine out of 10 home purchases and refinanced loans,” the August 6, 2013, New York Times reported.
The good news is that the guarantees are “holding down interest rates, helping the housing market and the broader economy to recover,” according to the Times. Concerns arise, however, from the government’s attempts to avoid another housing crisis by tightening its criteria for guaranteeing mortgages. After all, the government’s on the hook for a guaranteed mortgage that goes belly-up.
But every action has a reaction, and the banks have been rejecting more loan applications. “Every few days somebody comes in who in my mind should be able to get a mortgage loan, and I have to turn them away. It’s like trying to push ice cream out of the wrong end of the ice cream cone,” according to a Boulder, Colorado mortgage broker quoted in the Times article.
As the Times sees it, this outcome puts the government between a rock and a hard place: “making the cost of the [housing finance] system an explicit government obligation, or making it harder for Americans to buy homes.”
Some policy analysts believe government shouldn’t have to make this choice. According to them, government-backed mortgages distort the economy and subsidize homeownership, “with much of the benefit flowing to affluent Americans at the expense of biomedical research or bridge repair.”
