Federal government has dramatically expanded exposure to risky mortgagesOctober 3, 2019
The federal government has dramatically expanded its exposure to risky mortgages, as federal officials over the past four years took steps that cleared the way for companies to issue loans that many borrowers might not be able to repay.
Now, Fannie Mae, Freddie Mac and the Federal Housing Administration guarantee almost $7 trillion in mortgage-related debt, 33 percent more than before the housing crisis, according to company and government data. Because these entities are run or backstopped by the U.S. government, a large increase in loan defaults could cost taxpayers hundreds of billions of dollars.
This risk is the direct result of pressure from the lending industry, consumer groups and political appointees, who clamored for the government to intervene when homeownership rates fell several years ago. Starting in the Obama administration, numerous government officials obliged, mistakenly expecting that the private market ultimately would take over.
In 2019, there is more government-backed housing debt than at any other point in U.S. history, according to data from the Urban Institute. Taxpayers are shouldering much of the risk, while a growing number of homeowners face debt payments that amount to nearly half of their monthly income, a threshold many experts consider too steep.
Roughly 30 percent of the loans Fannie Mae guaranteed last year exceeded this level, up from 14 percent in 2016, according to Urban Institute data. At the FHA, 57 percent of the loans it insured breached the high-risk echelon, jumping from 38 percent two years earlier.
This article is based on interviews with 24 senior administration officials, regulators, former regulators, bankers and analysts, many of whom warned that risks to taxpayers have built up in the mortgage sector with very little scrutiny.
The binge in high-risk lending has some executives and regulators on edge and could grow problematic if the economy continues to weaken or enters a recession, as more economists are predicting could happen within a year. Two Freddie Mac officials told a government inspector general earlier this year that certain loans they had been pushed to buy carried a higher risk of default, and problems could multiply when the economy slows.
“There is a point here where, in an effort to create access to homeownership, you may actually be doing it in a manner that isn’t sustainable and it’s putting more people at risk,” said David Stevens, a former commissioner of the Federal Housing Administration who led the Mortgage Bankers Association until last year. “Competition, particularly in certain market conditions, can lead to a false narrative, like ‘housing will never go down’ or ‘you will never lose on mortgages.’ ”