The Federal government’s involvement in home loans has been a disaster, costing the nation hundreds of billions of dollars, damaging the nation’s credit rating — probably permanently, and causing misery for millions of people. It was all preventable, but childish ideals got in the way of clear thinking. You don’t have to be an economist to understand these principles.
Q. If you increase the demand for something, do prices go up or down?
A. Up. Most people understand that intuitively.
Q. So if the government decides that more people should own homes and makes it easy for them to borrow money for them — whether they can afford it or not — will home prices go up or down?
A. Up, of course. That is what drove home prices up in the housing bubble. So the government increased housing costs for everyone, including the people they were trying to put into homes.
Q. At a given price of a house, say $100,000, and all other things being equal, which borrower is more likely to repay, the one who makes a down payment of $10,000, resulting in a $90,000 loan balance, or someone who borrows at 100%?
A. The one who made the down payment, of course. Even if you ignore that those who have the cash to make down payments are probably in a better financial situation and more likely to make payments, the lower mortgage will have a lower payment. But the government made it easy for people to borrow with no money down. Then people were surprised when loan defaults went up.
Q. If you could go to Las Vegas and gamble knowing that you could keep all your winnings and others would cover all your losses, would you go?
A. Of course! And that’s why bailouts are always horrifically bad ideas. The mortgage mess involved government promises to cover losses, so people did exactly as expected: They made loans they never would have made otherwise.
The government needs to get out of the home loan business. Privatize Freddie Mac and Fannie Mae asap.