As of last year, the government has allocated about $1.6 trillion for home loans. Experts believe that the influx of government financing is the main reason why homes are sold and more grounds are broken for new construction. The downside to this, though, is that of the borrowers fail to pay their mortgages, the taxpayers will suffer.
The plan for a federally-backed guarantee was proposed during the recession. Now, four years after the 2008 recession, the plan is still in place. Analysts say that it is imperative for the U.S. government to get out of the housing guarantee scheme to encourage the industry to stand independently .
But the removal of such plan would affect veterans, first-time home buyers and low-income buyers since these are the people who use government backing schemes.
Why Government Guarantee is Needed
The federal government started to interfere in the mortgage market when two giant but private mortgage firms fell – Freddie Mac and Fannie Mae. Since the mortgage market is deeply intertwined with the housing industry then that would mean a fall in one, would also result in the fall of another. It’s like a domino effect and it is the role of the government to stop it from happening.
According to the ProPublica.com, government intervention in the mortgage and housing industry began when it was realized in 2008 that the lack of sufficient planning and guidance led to the failure of the banking system. As a result, fewer loans got approved and more homes stood unsold. Construction also came to a halt and that greatly affected the employment rate too.
But the intervention did not happen smoothly as there were a lot of criticisms in place. With justification and favorable results, government guarantees prospered and continued until today.
It’s Time To Put a Stop to Backup Guarantees
Financial analysts believe that with the budget cuts happening, the federal government may no longer be able to release new guarantees that would help borrowers like you. Instead, actions are being done to legalize other potential sources of funding like online lenders offering bad credit loans. But given the dependency, an abrupt stop to government help will not be the best way to go.
According to Cecala, the housing industry is now robust enough to buffer stronger adjustments and that implies a ceiling on government backed loans. Government guaranteed loans are now set at $700,00 max – a figure about fourteen times the average income for households. This is something not considered affordable housing and not every middle-class family will not be able to afford it. Capping at a more expensive loan is the first step to total withdrawal of government-backed guarantees.