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.