Dr. Kenneth Rosen, Chairman, Fisher Center for Real Estate and Urban Economics and Professor Emeritus, University of California, Berkley emerges as a bit of a contrarian in an article in RealtyTrac's March Housing News Report.  Rosen says he is concerned that the new housing finance system that is being built will only serve to sustain today's tight credit conditions, in itself a situation he calls unsustainable.

He describes the housing market as functioning as a "virtuous cycle;" the first time homebuyer progresses to the trade-up buyer and on to the downsizing buyer.  However there is a lot of stickiness in this system and systemic problems that perpetuate sluggish sales.  Low savings for downpayments are part of the problem, but a larger obstacle is the current state of the mortgage market.

The federal government is supporting nine out of ten loans and private lenders are lending only to the well-off but both sectors are similarly focused on borrowers with high credit scores and even FHA scores have increased substantially since 2009.  Credit this tight leaves many buyers on the sidelines and now there are the new regulations that went into effect in January that are reframing the underwriting process.

Rosen said he understands the reasons behind the tight credit conditions and new Federal standards but appears to consider them an overreaction.  He calls the pre-crisis period of 2004 to 2008 highly unusual in that high risk was driven by the expectation that house prices would continue to rise.  When they did the exact opposite for the first time nationally since the Great Depression both risky loans and traditional ones went south and home values went negative. 

There were 4.5 million foreclosures and the worst credit damage was done to low and moderate-income households.  That the riskier loan structures have been eliminated is a good thing, Rosen says.  But "that we have created a system where credit is limited to those who are better off is simply not sustainable going forward."  He maintains that the 2004 to 2007 bubble years, far from being the norm, were an aberration in five decades of successful lending and that more than 40 years of experience proves, credit can be mad widely available with strong underwriting and good performance.

Before credit scores dominated a lender would look at employment and other compensation factors to approve a loan.  Now lenders will be looking for each borrower to achieve certain parameters for QM safe-harbor and deem other borrows ineligible.  Under the old rules a 620 FICO with 5 percent down was an insurable prime loan, today 680 is the new 620.  "That line of demarcation is simply too high and squeezes too many families into higher cost loans or out of the housing market completely."  He said the concern is that many low and moderate income families will be forced to remain renters, not by their own choice, but as a result of the cumulative impact of regulatory rules seeking to create a limited risk environment. 

A robust primary and secondary market for mortgages is also key and after the debacle there is concern about restarting that securitization market but it is critical to broadening access to credit. "It is our belief that the combination of pooling and securitization will create good performing loans, a profitable business for the lender, attractive risk/return options for investors, and access to credit to the widest number of potential borrowers."

Rosen said that we must acknowledge that even in the prior more open credit environment homeownership was more accessible to white, higher-income traditional family households than to minority households and all one need do today is look at studies such as one from the Harvard Joint Centre on Housing showing that communities of color will account for more than 70 percent of net household growth between 2013 and 2023 to realize that mortgage finance is simply not keeping up with reality.

Rosen recommends four changes that must be made to the current system to make it more equitable:

1.       Ensuring that the Qualified Mortgage provides access to both low and moderate-income families;

2.       Ensuring that pooling of risk and securitization is used to expand opportunity and create investment options;

3.       Ensuring that the system builds and supports a pipeline of future home buyers willing to save and improve credit quality in pursuit of homeownership; and

4.       Ensuring that the system allows access by way of loan products and terms that do not invite foreclosures.