New Government Initiative Channels Funds through State/Local Agencies
As the housing crisis enters its twighlight hour, the government is still fighting tooth-and-nail to ensure its relative stability. Towards that end, it just announced a new initiative aimed at low-income borrowers. Under the new program, capital will be provided to state and local agencies (FHAs) so that they can make loans to this strata of borrowers; ultimately, the loans will be repackaged by Fannie Mae and Freddie Mac, and sold to the US Treasury Department.
Low-income borrowers have always been at a disadvantage when it comes to obtaining mortgage financing. State and local agencies have thus played a valuable, and even necessary role, in funneling cash to this under-served group of borrowers. As a result of the credit crisis, however, such agencies have had an extraordinarily difficult time obtaining capital, and many are operating at only 20% of normal lending capacity. Historically, they have been able to count on Fannie and Freddie to purchase their mortgages and satisfy their capital needs; since being nationalized in 2008, however, Fannie and Freddie have also had a difficult time meeting their capital needs, with 2009 bond issuance projected to be only 25% of 2007 levels.
30 states have already signed up for the program, and it is expected that more will follow. In order to participate, every agency will have to pay a fee for each mortgage that they originate, which should be offset by the lower interest rates and cheap access to capital. From the government’s standpoint, it is expect that these fees will defray all of the costs associated with the program. While there is no fixed budget, government officials anticipate healthy demand, and hence, healthy costs, perhaps as high as $35 Billion. Plus, the federal government will ultimately be on the hook for any mortgage defaults. As advocates of the program note, however, these state and local agencies have a strong track record. Despite targeting risky borrowers, they typically only issue 30-year fixed-rate loans, and require rigorous documentation of assets and income.
It is unclear how long the program will last, since it is being justified retroactively on the basis of a law passed in 2008. Government officials have been clear in their insistence that this initiative is intended to serve as a stopgap measures, and that these agencies should effect the government to fulfill their capital needs in the future.
From the standpoint of borrowers, this should provide a minor windfall, as loans can be used either for home purchases or for fixing up rental properties. Even before the inception of the credit crisis, such borrowers have largely been locked out of the conventional financing system. Now, they will have a chance to obtain mortgages, at reasonable cost. For more information, and to find an agency in your area, consult the National Low Income Housing Coalition.