Housing Stick Save or Blow Off Top?

America’s leadership decided to do it again. American regulators are pushing weak borrowers into home-ownership again just like the 00s housing bubble but via a different method. This will place people with little to no equity into homes they cannot afford long term as nothing more than renters but with a different designation. The generous explanation is that this is an attempt to stabilize a housing market that has rolled over, and the cynical take is that this is the blow off top to allow early receivers of housing related debt an exit before housing crashes.

We have seen this before and it ended in tears. One of the key factors that contributed to the 2000s housing bubble was the availability of easy credit. Lenders were eager to lend money to people with little or no credit history, often with no down payment required. This made it easy for people to buy homes that they could not afford. When the housing market began to decline, many of these borrowers were unable to make their mortgage payments, were unable to refinance and defaulted on their loans. This led to a wave of foreclosures, which caused real estate prices to plummet, which triggered other marginal borrowers to walk away from their homes.

For decades, the federal government has implemented programs that are designed to help high-risk borrowers obtain mortgages. For example, the Federal Housing Administration (FHA) insures mortgages for borrowers with low credit scores and little money for a down payment. This means that lenders are willing to lend to borrowers who might not otherwise qualify for a mortgage. Similarly, Fannie Mae and Freddie Mac, two government-sponsored enterprises that purchase mortgages from lenders, also have programs that help high-risk borrowers obtain mortgages. The disgusting feature now is this punishes borrowers with solid credit to aide high risk borrowers because surprise surprise, the left’s low income coalition members need it.

While an attempt to stabilize prices might make sense, we need a natural market correction with the rise in interest rates. Artificially juicing demand will only make the correction deeper and worse. In addition to the problems caused by high-risk mortgages, the government’s programs to subsidize high-risk borrowers will contribute to a rise in housing prices. When more people are able to buy homes, there is greater demand for housing, which drives up prices. This can lead to a situation where homes are overpriced, and people are paying more than they can afford for their homes. The stipulations in the new regs even cites higher payment to income ratios of 40%! If real estate prices continue to rise, it will become more difficult for high-risk borrowers to make their mortgage payments, increasing the risk of default.

The government’s programs to subsidize high-risk borrowers will lead to a decrease in lending standards and quality of MBS portfolios. When lenders are forced to lend to high-risk borrowers, they are forced to overlook issues such as low credit scores and high debt-to-income ratios. The waves of defaults will hit concentrated pockets in the national market, but eventually, all will feel its effects. If you are renting now, sit tight. This jet fuel to demand will end and when the market crashes, first time buyers will have a generational opportunity.

4 Comments Add yours

  1. RhymesWithMewish says:

    The housing market has to be tabled to save Blackrock


  2. GDR says:

    Was this written before the news about additional fees and higher payments for people with better credit scores? Love to see an update with that info in mind.


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