Trillions More for the Wrong Housing Policy

The Obama administration today unveiled yet another program designed to prop up the housing market, this time providing additional aid to state and local housing agencies in an effort to keep rates low and expand financing for low and moderate income borrowers.

The bailouts of Fannie and Freddie and the likely bailout of FHA have taught the administration nothing.  This new initiative amounts to a tripling down on the same wrong housing policy.

As Charles Lane opined in Sunday’s Washington Post:

For decades, the U.S. government has subsidized homeownership — via FHA insurance, the mortgage interest deduction, Fannie Mae and Freddie Mac, and many other programs. The resulting overinvestment in residential real estate is a major cause of the current crisis. Yet, in trying to cope with the crisis, Washington is pouring on more housing subsidies, thus deepening the federal commitment to the old strategy and making it harder to move to a new one.

The government’s reaction to the accelerating house price downturn in late-2008 has been to pump over $1.6 trillion in stimulus into the housing market over the last 13 months, with a likely $700 billion yet to come over the next 5 months.  This has been undertaken in an attempt to keep market values from declining to a more sustainable equilibrium point.

Combine this over-stimulus with creative financing and the government’s new role as predatory lender emerges. FHA has done hundreds of billions of predatory lending over the years, with its pace increasing many fold just over the last two years.

Some examples:

1. The “Magic Moment” loan offered earlier this year by Toll Brothers using FHA financing:

…a phenomenally low 2.875% mortgage rate. This special financing package offers a fixed rate, 30 year mortgage with a first-year rate of 2.875%, followed by 3.875% for the second year. For the remainder of the loan, buyers will enjoy the already low rate of 4.875%, fixed for the full term. You’ll save thousands, and start your mortgage payments the easy way.

2. The terms currently offered by the Texas Department of Housing and Community Affairs: zero down and FICO scores as low as 580 through Bank of America.

These are the kinds of high risk lending that many of the state and local housing agencies will be funding under the administration’s new program.

I believe that the government’s efforts will ultimately be futile.  The $2.3 trillion in new stimulus will come back to haunt us, just as the $7 trillion in government mandated stimulus aimed at the affordable housing market pumped in over 1993-2007 caused the biggest housing bubble in our history.

Overly stimulative housing policies are dangerous to all homeowners, but particularly to the 30% of homebuyers using FHA to put little or nothing down and the homeowners continuing to use their homes as piggy banks, as evidenced by the fact that about 30% of Fannie and Freddie’s volume in the first half of 2009 consisted of cash out refinances. On an encouraging note, Freddie just announced on October 9 that it is reducing the maximum loan-to-value on cash out refinances by 5%.

The government may be able to temporarily pump up home values with trillions in stimulus and gimmicks such as those noted above; however the two-thirds of homeowners that have mortgaged their homes will likely face a continuation or re-occurrence of the foreclosure nightmare. Even the one-third of homeowners who own their home free and clear will see a further diminution in their perceived household wealth.