Housing Insanity

If you want to know why us libertarian types are skeptical of the government's ability to prevent housing market bubbles, well, I give you Exhibit 9,824:  the government's new $1000 down housing program.

No, really.  The government has apparently decided, in its infinite wisdom, that what the American economy really needs is more homebuyers with no equity.

Now, qualified homebuyers in the three states pioneering Affordable Advantage do not need to put down the 3.5 percent minimum down payment required by the Federal Housing Agency, or much of a down payment at all. They can get 100 percent financing -- a loan as big as the purchase price of the house -- for a 30-year, fixed-rate mortgage -- a vanilla mortgage. The deal includes a program to help homebuyers if they become unemployed, lowered fees and there is no requirement that the homebuyer purchase mortgage insurance.

Wisconsin started the program first, in March, offering 100 percent loan-to-value mortgages for borrowers with a minimum credit score of 680. "It's a good credit score," explains Kate Venne, the spokesperson for the Wisconsin HFA. "In addition, we want to see what other lines of credit people have, and their performance. We look at their work history. We call their employers." Thus far, Wisconsin's HFA has offered $52 million in mortgages to 450 buyers.

Now, commentators left and right can agree that this is not a good idea.  No matter how stable said low-income homeowners are, they shouldn't be buying houses with no equity, because if they suddenly have to sell said houses, they're going to have trouble coming up with 6% to pay the broker, closing costs, etc.

So why is the government doing this, even though I can think of no policy analyst who doesn't actually work for the National Association of Realtors who would say that this is a good idea?  Because politicians want to help poor people with capital formation, and homeownership is the way that the American middle class has traditionally gone about capital formation.

It's true that this particular program is small--I don't think the economy is going to be brought to its knees by several hundred houses.  The important thing, however, is that this is how the government thinks about housing.  The private bankers have at least reacted to their little scare by getting somewhat more conservative about the loans they offer--probably not conservative enough, but still, more conservative.  The FHA, on the other hand, is still out there offering 3.5% mortgages to anyone who can meet some fairly basic guidelines; those mortgages now account for almost 20% of all home purchases.  Yet so far, the FHA has cracked down in only one area:  it now requires a 10% downpayment from buyers with very bad credit.  On the other hand, it's also expanded into pricier homes, so I'm not sure you can say the loan criteria have tightened overall.

The private bankers have to tighten, because they need to protect themselves.  The government is less worried about protecting itself from default than protecting itself from voters who want to buy a home at cheap rates.  Small wonder they've decided to "help" low income homeowners into dangerous loans.

Presented by

Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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