It is no secret that many college graduates are up to their eyeballs in debt. Many graduates have the equivalent of a home mortgage but not the house. Most people borrow money to buy a house, but those with large student loans do not have sufficient credit to buy into the housing market. These folks need to pay down or pay off their student debt before they can take on a mortgage and buy a house. Once they get to a point where they have a modest amounts of student loan debt or no debt at all, these folks are now in a position to borrow to buy a house and service the debt.
Fannie Mae has another idea altogether “More Cow Bell!” That is to say, the solution is more debt. FNMA has designed a lending program specifically designed to expand the amount of credit available to those drowning in student loan debt. (1) One way they do this is with a Student Loan Cash-Out Refinance. People can roll their student loans into a mortgage (at a higher interest rate and + private mortgage insurance, no doubt). But bear in mind, if you are up to your eyeballs in student loan debt, it only follows you do not have cash for a down payment. So let’s face it. For this to work, FNMA will have to allow no down payment mortgages, and/or allow people to borrow more than the value of the house. (This was a common practice that helped fuel the housing boom, which we all know led to a massive bust.) (2) The second way they do it is treat debt someone is liable for, but someone else is paying as if it does not exist. For example, a person who has a student loan and the parents make the payments. Let’s just pretend that debt does not exist when defining how much someone can borrow to buy a house. What happens if the parents run into financial trouble or worse?
Wealth is measured by equity. The more equity you have, the the more wealth you have. How do you build equity? Why you save and invest. Borrowing might put you in control of an asset, but it does not increase your wealth. What it does do is redirect your income to debt service.
This is a bad idea, full stop. It is particularly bad right now as it comes at a time after real estate has returned to bubble levels. Levering up to buy an overpriced asset is a prescription for disaster. One does not need a crystal ball to see the next bust coming. It seems Fannie Mae has not learned anything from the past.
This is a recent Fannie Mae New Release
