NCPA - National Center for Policy Analysis

How the Government Is Creating another Housing Bubble

December 3, 2010

It looks like the government will soon use the taxpayers' checkbook again to create a vast market for mortgages with low or no down payments and for overstretched borrowers with blemished credit, say Peter J. Wallison, a senior fellow, and Edward J. Pinto, a resident fellow, at the American Enterprise Institute.

The Dodd-Frank Act, which imposed far-reaching new regulation on the financial system after the meltdown, allows the administration to substitute the Federal Housing Administration (FHA) for Fannie and Freddie as the principal and essentially unlimited buyer of low-quality home mortgages.

  • Along with two other federal agencies, FHA now accounts for about 60 percent of all U.S. home purchase mortgage originations.
  • This amounts to more than $1 trillion and is rising rapidly.
  • The administration justifies this policy by saying it is necessary to support the mortgage market, yet borrowers are once again receiving high-risk loans.

The goal of Congress and regulators should be to foster the residential mortgage market's return to the standards that used to prevail in 1990, before the affordable housing requirements were imposed on Fannie and Freddie.  

  • At that time, mortgages required 10 percent to 20 percent down payments, and were only made to borrowers with good credit and relatively low debt-to-income ratios.
  • When loans of this kind were the standard in the residential mortgage market, we did not have financial crises brought on by the collapse of a housing bubble.

The Dodd-Frank Act, however, exempts the FHA and other government agencies from appropriate standards on mortgage quality.

  • For example, thanks to expanded government lending, 60 percent of home purchase loans now have down payments of less than 5 percent, compared to 40 percent at the height of the bubble, and the FHA projects that it will increase its insured loan total to $1.34 trillion by 2013.
  • Indeed, the FHA just announced its intention to push almost half of its home purchase volume into subprime territory by 2014-2017, essentially a guarantee to put taxpayers at risk again.

Source: Peter J. Wallison and Edward J. Pinto, "How the Government Is Creating another Housing Bubble," November 30, 2010.

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