Tuesday, June 14, 2011

We Need LESS Regulation, NOT More

History is repeating itself in reverse as the Federal government imagines a world without mortgage lending.  The Great Depression spawned the creation of FHA, which allowed for smaller down payments and 30 year loan terms. The wide availability of financing actually precipitated that depression's housing recovery and the subsequent economic boom that launched the prosperity we have experienced for the last 70 years.

Today we are in the midst of the worst depression SINCE the great depression. Some would argue this one is WORSE and from a quantitative foreclosure and unemployment magnitude perspective they would be right - there are more foreclosures and unemployed people today than during the Great Depression. 

Wave after wave of misguided regulation in the name of risk prevention is like buying insurance AFTER the accident. This is pushing lenders OUT of the market at the WORST possible time. Secondary is DEAD except for the agencies and they are talking about getting rid of them. Really??

Dodd-Frank, Risk Retention, Servicer Lawsuits, Elimination of GSEs, increased downpayments, legislating compensation, larger down payments, OCC/FDIC/Fed regulation of non-bank financial companies.... it goes on and on. The biggest problem they are having in Washington is finding enough lawyers to write all the regulation... seriously - that's what Elizabeth Warren said.

Legislating a 20% down payment with the idea that this will eliminate risk and help the recovery shows how mis-guided and uninformed the legislators are.  FHA was created in 1934. It allowed homebuyers to put less than 20% down. So, in modern times, smaller downpayments have always been available for affordable housing. Private Mortgage Insurance, which allowed smaller downpayments on non-government related mortgage loans, re-entered the US housing market in 1957 (MGIC), and became mainstream in 1961 with the drafting of a model mortgage insurance law for all states to adopt. 

I read a blog posting in support of larger down payments that read "There was always a 20% downpayment until a few years ago." It's this kind of thinking that is spawning this counter-effective legislation and regulation.

For 5 decades, when there was an economic slowdown, we looked to real estate to pull us out of recession. Now we are doing everything in our power to shut it down. Where's Ronald Reagan and the Keynesian Federalists when you need them?

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