I’d like to believe that, at least for another ten years or so, no amount of government money will be able to override investors’ memories of the most recent housing bubble. But we may soon find out what lessons we really learned:
While everyone has been watching Fannie and Freddie, the administration has quietly shifted most federal high-risk mortgage initiatives to FHA, the government’s original subprime lender. 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 Dodd-Frank Act [the recent financial reform], however, exempts FHA and other government agencies from appropriate standards on mortgage quality. This will give low-quality mortgages a direct route into the market once again; it will be like putting Fannie and Freddie back in the same business, but with an explicit government guarantee.
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 loans 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.
The subprime bubble was years in the making by the time it popped, so if this FHA lending doesn’t continue for much longer and/or doesn’t accelerate, it might not be a problem. But it does make me worry that the political incentives haven’t changed since the ’90s and ’00s, and that maybe they won’t change in time to avoid another bubble, or at least some considerable long-term deadweight loss. And I’m not sure if FHA interventions benefit the same people that benefited from the pre-crash policies, but if they do and they’re keeping people in homes in Florida and Arizona exurbs, then it will only prolong the recession and delay the inevitable economic recalculation.