More Hair of the Dog

When you have a hangover, one cure is to drink more, though this is clearly a short-term solution. Since the housing market began to falter in 2007, Washington has tried to help via foreclosure mitigation, increased guarantees from the FHA, higher guarantee thresholds from Fannie Mae and Freddie Mac, Fed purchase of mortgage assets, and the $8,000 home buyer's tax credit. Yet housing, and the economy, remain in a slump. The people in unsustainable consumption and production, and everything around them, are not investing because they know there's no future for them.

The NYT highlights people concerned about some new proposed mortgage regulations that would seem a no-brainer given what just happened.

the first point of attack is on a proposal that would require sellers of mortgage-backed securities to retain part of the risk should a package of loans go sour. The sellers would have to keep on their books at least 5 percent of the value of any baskets of loans they purchase from lenders and then resell to investors. One of the few exceptions to the requirement would be for mortgages on which the home buyer has made a down payment equal to 20 percent of the purchase price.

“Most people don’t have 20 percent to put down,” said Janis Bowdler, a project director in La Raza’s office of research, advocacy and legislation. “These rules will so significantly deter the ability of first-time buyers to break into the market that we will see a real decline in home ownership.”

Someone who can't come up with 20 percent should not a home, they should rent. Homes require big cashflow investments for random problems such as broken water heaters, air conditioners, flooding. If you don't have $10k lying around, your house is uninhabitable after such contingencies. Then there's standard maintenance. As the Zimbabwean squatters found out with farming, you need to invest and cultivate a farm for it to be productive, it doesn't just produce. So too with housing, as homes need constant investment just to keep them from falling apart: landscaping, fixing wiring in the house, new carpets, etc.

Putting poor people into homes they can't afford leaves no one with both an incentive and ability to maintain it, and so such neighborhoods decay. Many inner cities have once beautiful homes that are now worthless, and though it doesn't happen overnight, the waste is rather pathetic. Better for everyone--neighbors, themselves--if they rent. After all, housing is not, primarily, an investment, but rather consumption item falling under 'shelter'.

On one hand, this problem is solving itself as no one will buy paper with less than 20% down mortgages, on the other hand, there's an exception: government guaranteed mortgages with only 3.5% down. The government guarantees 90% of mortgages today, which only prolongs the inevitable, and is a major reason why we aren't out of our slump, because people are not being reallocated to their sustainable patterns of trade and consumption. This mispricing of risk is born by taxpayers and so, like Fannie and Freddie and the whole mortgage bubble, is an easy way for do-gooders to superficially address the problem. It may not have been obviously stupid in 2006, but it is now.