WASHINGTON: Current market problems and reforms in the underwriting and pricing of subprime loans, including the tightening of underwriting standards by regulators, will have a short- term impact on housing markets.
That will be lessened if Congress enacts legislation to expand the roles of Fannie Mae, Freddie Mac and the Federal Housing Administration to provide more housing opportunities to lower-income homeowners and those living in high cost metropolitan areas, says the National Association of Realtors.
NAR Senior Vice President and Chief Economist David Lereah predicted that tighter underwriting practices may cause total home sales to fall by about 100,000 to 250,000 nationally, or no more than 3 percent a year over the next two years. Many of these households will probably, over time, purchase a home when they have attained the financial capacity to do so by saving for a down payment or growing their income.
"Foreclosures are increasing inventories in certain local markets. The projected flood of foreclosures are problematic and will add to the already loose housing supply in some local markets, but these local markets are exhibiting healthy economic activity, enabling them to be able to absorb increases in foreclosures," Lereah said.
"From a broader perspective, today's subprime problems are occurring against a backdrop of cyclically low mortgage rates and a growing, healthy economy. Jobs and liquidity are plentiful in the marketplace, suggesting that the subprime problems may be a manageable problem within our $10 trillion-plus economy," said Lereah in a commentary distributed to NAR members recently. "Many of these households will seek mortgage loans from a revitalized FHA, from lenders making loans that meet Fannie Mae and Freddie Mac standards, and from other lenders offering fair and affordable mortgage options to subprime borrowers. Remember, many of these borrowers are low-income, minorities and first-time buyers -- all important participants in the home buying marketplace."
Lereah warned against overreaction to the situation. "Tougher lending standards imposed by the marketplace and the regulators are necessary, but we need to be mindful of overcorrection. Responsible lending practices are what the doctor ordered, not practices that cause a credit crunch," Lereah said.
NAR President Pat Vredevoogd Combs has led a campaign to modernize and revitalize the FHA mortgage insurance programs, providing subprime borrowers with a safe and affordable alternative to problematic loans and helping bring stability to the whole subprime market. "FHA mortgages can help meet the demand for subprime mortgages and help fill the gap in the mortgage market left by the decline of subprime and nontraditional products.
A few simple changes can make a big difference. NAR supports increasing FHA loan limits, allowing risk-based pricing of mortgage insurance premiums and reducing down payment requirements to reflect today's mortgage market," Combs said.
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