Equity in a home typically means more stability for homeowners. When a buyer has a small down payment in a declining market, he is likely to be underwater quickly, and underwater mortgages tend to have big problems:
Underwater homeowners are of particular concern because they are more likely to default on their mortgages. First, households with mortgages worth more than their homes are unable to refinance their way out of the high-cost mortgages they can no longer afford. Second,even households who could afford to continue paying their mortgage may choose to strategically default, and walk away from their homes when there is no equity left to preserve . Some economists project that housing prices will continue to fall in 2010, increasing mortgage defaults by pushing more homeowners underwater and deepening the negative equity position for those already underwater.
Fox News recently had an interview with Bruce Marks of Neighborhood Assistance Corporation of America, and Ronald Phipps, president of the National Association of Realtors. They were discussing recent proposed changes for the mortgage industry. Since one organization sells houses and the other sells mortgages, it is not surprising that they were on the same side of the fence.
Both men say that by allowing government agencies to require lower down payments, it gives them an advantage. Granted, it gives these agencies the lion’s share of the business, but it makes the loans riskier, and the risk is shouldered by taxpayers. It also puts borrowers in a less secure position.
I have no problem with looser regulations for lenders, when those lenders shoulder the risk. If they want to play fast and easy with their own money and are willing to take the consequences, why not let them? However, when taxpayers are required to make good on these loans, I like to see tighter regulation myself. It’s our money they are playing with.
Much as I hate government regulation, there needs to be accountability somewhere. Lenders have been “privatizing the profits and socializing the risks” for too long. As long as the government makes high moral hazard public policy, the housing market will remain a mess.