Out of Control Policy Blog

Lending Standards Back to Bubble Era Levels

Seriously, low lending standards are a huge part of what got banks and mortgage companies into this mess. From BusinessWeek:

FHA"Blamed for contributing to the housing bubble, zero-down-payment loans largely vanished when the market crashed and Congress blocked seller financing for government-backed loans. Now the federal government will be forking over cash at closing.

Buyers who haven't owned a home for three years or longer are eligible for an $8,000 tax credit, thanks to a provision in this winter's stimulus package. Now, under a little-noticed program announced May 29, the Federal Housing Administration will steer the funds to cover closing costs directly—in some cases even offsetting the 3.5% minimum down payment FHA loans require. That's enough to cover most or all of the down payment and fees for homes up to the U.S. median price, now about $169,000."

The government does not seem to understand that it is okay if some Americans don't own a home. While home ownership levels have risen slowly over time, they jumped 8% (from around 62% to 70%) during the bubble period, rapid growth that was bound to require many people who simply can't afford a mortgage payment. This is why we have a healthy system of rental properties around the country. 

Cutting the down payment on a home certainly will help many responsible home buyers (including one Reason staffer who recently took advantage of the program). But the FHS program is destined to lead to more foreclosures down the road as families, even with the government's help, come to terms with the reality of money. Unfortunately, it is probable that many of those families that will have to foreclose in five years on the government aided home purchase would have been fine waiting a few more years to save and get in a financial position to own a home for the next 40 to 50 years.

Reason on the "little-noticed program" from March.

Reason on Economics, Bailouts, and Stimulus.

Anthony Randazzo is Director of Economic Research


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