Return of the low down payment zombie
Mr. Melvin Watt runs FHFA, the Federal Housing Finance Agency charged with regulating Fannie Mae and Freddie Mac. Yesterday Mr. Watt said:
blockquote>To increase access for creditworthy but lower-wealth borrowers, FHFA is also working with the Enterprises to develop sensible and responsible guidelines for mortgages with loan-to-value ratios between 95 and 97 percent. Through these revised guidelines, we believe that the Enterprises will be able to responsibly serve a targeted segment of creditworthy borrowers with lower-down payment mortgages … [this] is yet another much needed piece to the broader access to credit puzzle.
Mr. Watt wants to return to the good old days when you could buy a house with 3% down, and in particular he wants poor people to be able to buy a house leveraged 33:1.
This is the return of a terrible idea, a zombie I thought was destroyed when the housing bubble burst. Many homeowners, of all income levels, were too highly leveraged and bought more home than they could afford. They gambled that housing prices would rise forever. Many lost that gamble. They were hurt, their neighbors were hurt, and the financial institutions that held their mortgages were hurt. When the housing bubble burst and financial institutions collapsed, the global economy tanked. Over leverage and tiny down payments (and not just for the poor) contributed significantly to the housing bubble, the financial crisis, and the resulting severe recession.
In May of last year I wrote:
By nominating Mr. Watt the President signals a return to the pre-crisis philosophy of regulating housing finance risk. That is a huge mistake. Mr. Watt should not be confirmed to head the FHFA.
There is a tradeoff you get when policies encourages expanding credit. More people are able to buy things they could not otherwise afford, but at the same time more people end up in credit trouble. This balance clearly went too far in the easy credit direction in the late 90s through the late 00s.
In their never-ending quest to be “pro homeownership,” for more than two decades policymakers and elected officials on both sides of the aisle took every opportunity to expand credit and subsidize home buying. The GSEs’ regulatory structure allowed them to ignore the costs and risks of these actions until it all imploded.
The usual left-right DC housing debate centers on whether one should distort policy to give preferential treatment to poor borrowers. The far left says yes, and many on the right say no. Mr. Watt’s announcement is consistent with the […]