Sunday, January 19, 2014


There is a powerful lobby in the US in favor of higher house prices.  Millions of Americans are homeowners and being generally richer and more politically active than renters they have disproportionate political influence.  In addition home builders and realtors also have an obvious interest in higher house prices which is expressed through lobbying by industry groups and trade associations.  The result is various government programs and policies which make houses more expensive.   These include various forms of government subsidized mortgages.  While such programs are sold as helping buyers in fact much of the benefit goes to existing home owners in the form of higher house prices (just as colleges capture much of the government aid to students by raising tuition).  In my view this bias in favor of high house values is not in the interest of the nation as a whole.  Trying to eliminate (or perhaps even substantially reduce) this high house price bias produced by government policy is probably unrealistic but I certainly think a substantial burden of proof should be imposed on people advocating biasing government policy even further towards high house prices.

Which brings us to this Kevin Drum post advocating fixing (which seems to mean even more government subsidies) the housing finance market without providing much in the way of evidence that it is broken.  He claims that even people with good credit (low 700s credit score) can't get mortgages which I highly doubt.  See for example according to this recent WSJ article reporting that the average credit score for approved mortgages declined in 2013 from 2012 and that plenty of mortgages are being approved for people with scores below 750 (or even 700).

Borrowers can still qualify for a mortgage with just a 3.5% down payment through the Federal Housing Administration, which has among the easiest qualification rules. The Ellie Mae report showed that the average credit score on an FHA-backed purchase mortgage stood at 690 in December, down slightly from 699 a year earlier. Average total debt-to-income ratios stood at 42% (lenders generally consider anything above 43% to be high).

Perhaps people with good but less than perfect credit scores can't get the very best rate on a mortgage but this is hardly surprising and isn't at all the same thing as being unable to get any mortgage.  Drum further claims (quoting Felix Salmon) that bank mortgage rules are designed to give the banks a reason to say no.  But this is a natural consequence of the fact that the loss on a bad mortgage is likely to be many times the profit on a good mortgage.  So it is much more costly for a bank to give out a bad mortgage than fail to give out a good one and bank rules and procedures will (or at least should be) designed accordingly. 

Considering recent history I think Drum should be embarrassed to be advocating lowering mortgage standards on such a flimsy basis.

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