Feds’ New Mortgage Rule: Here We Go Again

Peter Wallison points out the feds’ new, you-only-have-to-put-5%-down qualified mortgage rule will have the ironic effect of making housing less affordable to low-income consumers rather than more so:

Consider this: If the required down payment for a mortgage is 10 percent, a potential home buyer with $10,000 can purchase a $100,000 home. But if the down payment is dropped to 5 percent, the same buyer can purchase a $200,000 home. The buyer is taking more risk by borrowing more, but can afford to bid more.

In other words, low underwriting standards — especially low down payments — drive housing prices up, making them less affordable for low- and moderate-income buyers, while also inducing would-be homeowners to take more risk. [Emph. added]

Haven’t we tried this once already? It didn’t end well, if I recall. Policymakers can either write rules that encourage banks to lend to marginal borrowers, or they can write rules that encourage prudent lending. But the rules can’t do both at the same time.

Nor is it obvious anymore—given how the last housing bubble ended—why housing advocates should be encouraging home ownership in the first place. The theory is that widespread homeownership contributes to stable neighborhoods and is an effective way to build long-term wealth. The facts don’t necessarily bear that out. The countries with the world’s highest homeownership rates include Romania and Hungary, the lowest, Germany and Switzerland. Which countries would you prefer the U.S. resemble? Meanwhile, ownership reduces labor mobility and saddles borrowers with financial additional obligations, like taxes and upkeep, beyond the mortgage itself. Low-income borrowers were among the hardest-hit group after the housing market collapsed. Why create policies that threaten to put them through that all over again?

The purpose of the misbegotten Dodd-Frank law was to prevent a re-run of the housing collapse and financial panic. Rather than doing that, the rules the law has spawned seem custom-designed to ensure Bubble 2.0. Haven’t these people learned anything?

What do you think? Let me know!