In Washington, housing policy considers hundreds of esoteric factors viewed from the perspective of voting blocks, builders, buyers and renters, taxing authorities, mortgage lenders and taxpayers.  But from the consumer’s perspective, housing policy is fairly simple.  Consumers expect that policy will result in an affordable mortgage to be available for an owner occupied home within reasonable conditions.

An affordable mortgage generally means that monthly principal, interest and taxes do not exceed 28% of the family’s gross income.  Consumers look for ways to keep their monthly payments below that threshold.  For example, they may prefer the 30-year term to a shorter term.

Recently we have been comfortable with an interest rate that is about 2.3% above inflation.  In August 2013, 30-year interest rates were 4.4% — i.e., 2.6% above inflation.  A year earlier, 30-year interest rates were 3.6% — i.e., 2.1% above inflation at that time.  Consumers who can tolerate the higher payments under a 15-year term today will enjoy a rate of 3.4%, i.e. 1.6% above inflation.

Despite the effect on monthly payments, consumers often limit their down-payment to the minimum needed to secure a good mortgage rate.  Often that 20% of the home’s market value is demanded by lenders to limit their loss in the event of a mortgage default.

But term, rate and down payment are irrelevant if consumers’ can’t get the loan.

Before the recent financial crisis, mortgage brokers and most banks sold the mortgages they originated to investors — namely, Fannie Mae, and Freddie Mac.  A high percentage of those loans eventually defaulted pushing Fannie Mae near bankruptcy. The federal government bailed out Fannie Mae with a $116 billion loan and it took $116 billion in equity Fannie cannot buy back.

Since then, the federal government launched fraud suits against mortgage originating banks claiming the quality of mortgages was often misrepresented or that the banks mishandled mortgage defaults. Lately, Fannie Mae has aggressively forced banks to take back mortgages that are in default, regardless of whether fraud is involved.  Fannie’s loan portfolio is now much cleaner and it has turned much of its loss reserves into “profits.”  That reversal of fortune allowed Fannie to repay $105 billion of the $116 billion it owed the government.

The enactment of Dodd-Frank banking regulations is forcing banks to hold much higher levels of equity and become far more timid about lending.  Dodd-Frank regulations have forced the biggest 18 banks to double their tier-1 capital holdings from 5.6 percent of total capital at the end of 2008 to 11.3 percent at the end of 2012.  Banks now sit on an extra $400 billion they cannot loan as mortgages.  Congress recently proposed that banks be forced to hold 10% of any mortgage they originate and pay to insure the other 90% against default.  Banks’ earlier misbehavior needed corrective attention, but federal punishments are so clumsy that they curb banks’ incentive to issue mortgages.

Fannie, Freddie and FHA hold or back 87% of all consumer mortgages issued in the past 5 years.  Unfortunately within this concentrated market Fannie has become very risk averse.  The average FICO score on mortgages Fannie bought in 2012 was 756, up from an average of 720 in 2006.  The median FICO score in 2011 was 711.  Banks that are unwilling to hold the mortgages they issue are very aware of Fannie’s requirements and the result is that most consumers find it exceedingly difficult to obtain a new mortgage.

Until addressed by the market and a rollback of government regulations, our housing policy is dysfunctional.  Consumers feel caged in place while having their pocketbook pilfered.

Alan Daley is a retired businessman who lives in Florida and who writes for The American Consumer Institute Center for Citizen Research