In it’s attempt to stabilize the housing market, there is an 800 pound gorilla in the room that government is not adequately addressing. What is not being addressed is the answer to this question: "What should be our priority? Do we want to fill empty houses with "homeowners" or keep people in their homes?" It is critical to answer this question because we cannot do both.
There are estimates that there is a shadow inventory of seven million units out there- that’s a lot of homes to fill. During the boom the housing industry cranked out more than enough homes for all the credit worthy buyers- and more than enough for those that weren’t. Now a poor economy has hurt the incomes and net worth of many Americans- limiting the pool of credit worthy buyers still further.
The government has a stated goal of wanting to stabilize home prices, and that can’t be done with a massive supply on the market. Government backed lending has basically taken over the mortgage market in by providing easier [therefore riskier] loans than private lenders are willing to provide. As Federal Reserve chairman Ben Bernanke said yesterday:
[I]t is true that the FHA de facto has replaced … the riskier part of the mortgage market. It’s got a very high share now of new mortgages because it’s the only source of mortgages where down payments can be less than basically 20%. And so it is providing mortgage access to a large number of people who could not otherwise buy homes.
There’s a price to be paid for getting all those people into homes though- they can’t seem to hold onto them. According to the Mortgage Banker’s Association: Continue reading Do we want to fill empty houses or keep people in their homes?