Britain is imposing new standards on mortgage loans because, as a government spokesman says, “I think we just have to recognize that both firms, and indeed consumers, don’t always make the best decisions.”
Here in the United States we’re going in quite the opposite direction, pushing FHA loans (now 20% of the market, from 3% a year ago) now that Fannie Mae’s gone bust. The result: 20-year-olds buying houses with 3.5% down plus additional loans to guarantee they’ll be under water before the ink dries on their purchase contract.
It’s probably too late to reverse, but if there’s a chance we can undo the government take over of the mortgage market and avoid the paternalism of Britain’s approach, where acts of capitalism between consenting adults are prohibited, I think we should try. How? By unhooking the taxpayer from guaranteeing home loans, for one – that way, if a bank makes foolish choices it will fail, not the entire world’s economy. Two, eliminate the artificial stimulus of the interest deduction for homeowners. A level playing field where renting and buying had the same tax consequences and loans are not subsidized by taxpayer guarantees might bring som rationality to the world of real estate. Of course, Chris Dodd and the other friends on Angelo would miss out on some cash under this approach but they’re adaptable and I’m sure they’ll get by.