This morning the Washington Post reported:
The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place.
…administration officials say they are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs – including those offered by the Federal Housing Administration – that insure home loans against default.
Housing officials are urging the Justice Department to provide assurances to banks, which have become increasingly cautious, that they will not face legal or financial recriminations if they make loans to riskier borrowers who meet government standards but later default.
The Obama administration is concerned that even in the midst of the housing market’s recovery, many young people and people with bad credit can’t borrow money to buy homes. Yes, this sounds eerily similar to the policies that helped create the housing bubble in the first place. And yes, while ensuring that homes loans are available to all borrowers is a well-intentioned plan to help low-income families, it will likely hurt them.
This is a bad policy idea for at least three reasons:
First, it’s important to note that the administration is only promising to bail out banks, not borrowers. These loans would be going to people who probably don’t qualify for a standard mortgage and may struggle to make their payments. As a result, many of the borrowers are likely to default. If they do, they’d suffer financial losses and damaged credit ratings that could haunt their families for years to come. Meanwhile, if the loans go bad, the bank executives receive bailout checks.
Second, subsidizing things makes them more expensive. In looking at the Obama administration’s previous mortgage programs, Reason’s Anthony Randazzo noted there was “clearly visible bump in the [price of housing] starting in March 2009 when a number of the programs to help housing started to kick in, including low interest rates and the first-time homebuyers credit.” Guaranteeing home loans encourages low-income individuals to take out bigger loans for the same amount of house. This in turn makes their coming defaults even more ruinous than they would have been in an unsubsidized market.
Third, buying a house limits labor mobility, or the ability to pack up and move when you need a new job. Labor mobility is especially important to low-income, low-skill individuals.
What’s wrong with renting? Many low-income or young people would actually be better off with the flexibility that renting brings. Renting gives people a lot more freedom to move from job to job without being tied to a home and mortgage. Financially, renting doesn’t require the upfront costs of many home purchases and if you need to move it is often much easier to get out of a lease than it is to sell a home.
The housing bubble helped cause the last recession; we shouldn’t be rushing to repeat the mistakes that were made.