I have not been paying a whole lot of attention to the home mortgage situation, but I did notice last week that the Wall Street Journal reported on an announcement that the federal agencies that provide backing for home mortgages will lower the down payment requirement to as little as 3%. Just for some perspective, that would mean you could get a loan on a house up to $333,333 with a down payment of less than $10,000!
I also read a couple of pretty lucid commentaries in Bloomberg View about the decision to lower the down payment requirement. First this one, which makes an interesting observation about what happened in the residential lending market only a few years ago:
"…once the housing boom of the 2000s began, everything got messy. It was a frenzy compounded by three big errors:
1) Credit standards shifted from the borrower's ability to service the debt to the lender's ability to sell the loan to a securitizer
2) Automated underwriting was compromised by banking staffers
3) Overwhelming volume led to documentation errors."
Then I read this commentary, opining on the downside of (re)adopting policies that make home loans easier to get:
"But there are huge drawbacks to housing, too. Leveraged bets are great when they pay off; when they don’t, they leave you dead broke. Especially a bet on a large, illiquid asset such as a house. Put a homeowner into one of these gambles at the age of 35, send the local housing and job markets south a few years later, and the end result is a broke middle-age person with trashed credit in desperate need of a good rental unit. Which legislators should know, because we seem to have a lot of them around right now.
You also end up with a much more unstable housing market. When a huge segment of the market has negative equity or has equity too low to cover the substantial costs of a sale, then in any economic downturn, you are going to end up with a lot of foreclosures. Those foreclosures will, in turn, depress both the housing market and the broader local economy.
…most of us still haven’t managed to shed the idea that buying a house is a good way to get some unearned bonus wealth. Too many people managed to do just that for too many years. We think of 2008 as an aberration, rather than reversion to the mean. And that’s a costly mental error."
Those comments strike me as pretty insightful.
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