The Wall Street Journal reports that a coalition of mortgage lenders and left-leaning advocacy groups are complaining that mortgages are too hard to get for people with weak credit histories. The problem, according to these groups, is that lenders are afraid to lend these people for fear that the federal government will sue them if the borrowers default and FHA, etc., have to make good on their guarantees.
I understand the concern that lenders have about being sued by the federal government. The Justice Department has sued banks for billions of dollars in the past. And they are worried about it happening again. But the solution is not to ease up on lawsuits by the federal government when borrowers default and the federal government has to pay on its guarantee. The solution is for the federal government to get out of the business of guaranteeing mortgages. If there is no federal guarantee, there won’t be any federal lawsuit.
Before continuing, though, consider the kinds of deals that are getting done today (and this is a real deal I have heard about). The buyer is getting a 96.5% mortgage on a $185,000 house, while at the same time getting a $4,000 closing credit from the buyer. (“Closing credit” you might ask. Right. It’s a purchase price reduction they are not including for purposes of figuring out the mortgage.) That means the buyer is putting $2,475 down. Except this deal is in Illinois, where real estate taxes are paid in arrears. That means the seller has to give the buyer a credit for the unpaid real estate taxes for the rest of 2015 and seven months of 2016, if they close on July 31. Which means the buyer will buy a house without having to pay any money at closing. And even if the tax money the buyer gets at closing goes into an escrow, so the buyer doesn’t actually get, they are still buying a house for less than 1.5% down. How is this hard to borrow? Or any kind of smart economic policy?
But neither the lenders nor the advocates look at the bigger picture. Homeowners whose mortgages went underwater when house prices started going down in 2008 (i.e., the mortgage became more than the value of the house) were part of the cause of the 2008-09 fiscal crisis. And now we are setting it up so it could happen again. I don’t understand. In fact, in the example I mentioned above, the buyers are underwater the day they close. When you factor in the realtor’s commission to sell and other closing costs, the house is worth less than the mortgage the day the buyers move in.
Other countries don’t give 96.5% mortgages. There is no reason we should – unless some lender, using its own money, wants to do it. And even then, there are countries that don’t allow banks to do it because it’s bad policy. It creates risks for the country that just aren’t worth it.
I understand cutting back on 96.5% mortgages and federal mortgage guarantees will cool down the real estate market for a while. And people without a proper-sized down payment and a good credit rating won’t be able to buy a house. But maybe the real estate market needs to be cooled down, and maybe people who can’t afford it on their own, shouldn’t be buying houses. There is no constitutional right to buy a house. As a national policy, we want to make sure people have a decent place to live, but that doesn’t mean buying a house with virtually down money down and a weak credit rating.
Are mortgages too hard to get? No. In fact, they ought to be even harder to get. It would be better for the country – and probably better for the people who are buying houses they can’t afford.
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