How the State can take a role in mortgages & housing

In 1930’s America, the financial system was so devastated by the 1929 stock market crash, banks were largely still out action a decade later.

Homeownership

Homeownership is too important in every society to be left solely to the private market

The Great Depression wreaked havoc on the U.S. housing market with one-in-four mortgage holders in default on their loans. In response, foreclosure moratoria were enacted in 27 states designed to protect families as well as farmers.

Banks were in crisis, wrecked by bad loans, most were operating just to survive.

To alleviate a highly dysfunctional banking system the US Federal Government stepped in.

In 1939, as part of President Roosevelt’s New Deal, the Federal National Mortgage Association (FNMA or Fannie Mae) was established for the purpose of increasing homeownership and affordable housing.

The primary purpose of Fannie Mae was to provide local banks with federal money to finance home mortgages. By doing so, Fannie Mae created a secondary mortgage market that allowed banks to lend but not own the risk of those loans. This secondary mortgage market still exists, a testament to its genius.

Ireland is now in a similar place

Here in Ireland, the financial collapse of 2008 is still being felt. In 2015, fewer mortgages were drawn down than in 1979. This is despite the rapid rise in population and reduction in average family size. And while there has been a gritty rise in mortgage lending since 2011, the latest mortgage approval statistics from the Bank Payments Federation of Ireland reveals an alarming drop in approvals in the three months to January 2016.

Banks are nursing residential and buy-to-let arrears. In addition, tougher capital requirements make banks especially wary of lending, so they rely on fees and charges as a way of generating income.

The private banking system cannot be relied on as the sole source of mortgage funding in Ireland. It is too limited.

Restrictive Central Bank mortgage rules have also added to the decline although they have not caused it!

For borrowers, tighter bank lending guidelines means that in order to get a mortgage today, you must have either very rich parents or a very secure, high paying job. After the financial collapse, both are in short supply!

State activity

The state can play its part.

First, it must re-insert itself into the provision of housing, it did so before when times were tougher, it can do so again.

Second, it must take a more active role in the provision of mortgage finance. It could simply take the existing Home Choice model, fund it, market it and expand it across the country through local authorities, Post Offices, Credit Unions and even commercial banks using a mix of automated credit approval and a standard set of underwriting criteria. And, in order to increase the rates of approvals, its focus should be on the provision of access to housing by way of shared ownership over say a 15-year time period after which the property reverts in full title to the homeowner(s). In other words, the purpose of the initiative should be to promote homeownership, not a quick profit. In some aspects, it could mirror the CGT exemptions lavished on wealthy investors from 2011 – 2014; they must hold the property for seven years!

As it stands, the current provision of mortgage finance and housing are a disaster! Without private sector solutions, the State must lead!

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