Five years after the housing market fell apart, the federal government is still pushing banks to issue mortgages with as little as 3.5% down.
That’s the guideline for mortgages insured by the Federal Housing Administration, which accounted for 27% of all home purchase mortgages issued in 2011.
It’s completely nuts. The reason we faced such economic damage from the events of 2007-8 was that both borrowers and lenders had unreasonable expectations about real estate prices (i.e., they could only go up) and they made very high leverage investments based on those expectations.
To prevent a similar crisis from happening again, we should impose higher capital requirements on banks. But we also need higher capital requirements on homeowners: That is, higher minimum down payments, so homeowners are less likely to end up with a house that’s worth less than the mortgage balance on it when house prices fall.
And yet, it is still the policy of the Obama Administration to encourage people of limited means to take all the money they have in the world and put it in a highly leveraged real estate investment.
We see that not only in the continuation of very-little-money-down FHA mortgages. It also shows up in the Qualified Mortgage Rule, which sets out standards for what kind of loans banks can make without fear that the government will come back and say they were taking unreasonable risks or abusing borrowers.
This rule prohibits certain features like balloon payments and high upfront fees. It also sets a maximum ratio of debt to borrower’s income. It does not set a minimum down payment. Somehow, the Administration has come up with a guideline about loan soundness that doesn’t even address leverage.
Both banks and left-wing “housing advocates” wanted it this way. The banks wanted a free hand to be able to make loans without government repercussions. Housing advocates want it to be easy for people who can’t really afford to buy homes to get credit. The losers from this agreement are everybody else, who will be left to face the fiscal and economic costs of another foreclosure crisis driven by high leverage.
This is why it’s infuriating when people frame the financial crisis as a morality play. No, homeowners who overextended themselves do not bear the principal moral culpability for the crisis of 2008. But just because your behaviour wasn’t immoral doesn’t mean it need not change. Our national inability to admit that some people can’t afford to own and it’s OK to rent means the next burst housing bubble will cause similar pain to the last one.
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