Saturday, October 3, 2009

More fleshed out thoughts on preventing future housing bubbles

I've been giving this more thought recently, since pretty much nothing has been done to try to prevent future housing bubbles (indeed, the current administration/Congress has only done things to make the post-bubble recession worse). I've had thoughts on this previously, but these are my new, more fully-formed ideas, the up-to-date thoughts from my brain on this issue (until they get revised again).

First, let's establish some guidelines. An affordable loan is one which is approximately no more than 4x your annual income, based on general loan guidelines. Second, we'll call a loan made to someone which brings their total outstanding loan balance for all existing loans at the time of the loan under 4x annual income a "qualified" loan. Third, for annual income, we're talking average of last 2 years reported gross income for tax purposes.

Ok, so here's the thoughts:
- No loan which is not "qualified" can be subsidized by the government, at all, or traded on the government-backed exchanges. So no FHA, no Fannie Mae, no government money whatsoever for any non-qualified loan.
- No security containing or based on (eg: a derivative of) a non-qualified loan can be rated higher than A, by law, and cannot be owned by any fund/organization which buys only "investment-grade" securities.
- This one is more of a personal-preference, but I suggest we officially call non-qualified loans (by the above definition) "Over-extended" loans. This way there is no confusion about the intent, and it will be more difficult for ambitions RE industry people to push unsuspecting buyers into risky, over-extended loans.

At this point I'd normally make a wrap-up comment about how the Obamanation has failed horribly at their purported goal of consumer protection, and how all their so-called "reforms" are just socialist power-grabs, but I think at this point if you're smart enough to be reading blogs (or just reading, for that matter), the corruption and malfeasance of the Obama administration and our current Congress is probably self-evident, so I'll leave my thoughts to stand without the closing obligatory admonition of the idiots currently running the country (unless you count this sentence). :)


  1. 1. These guidelines are pretty close to common-sense lending standards, which people forgot about ten years ago.
    2. It might be better to link the loan amount limit to payment rather than to loan amount b/c at higher rates lower loan amounts will be affordable.
    3. The next bubble will be in something else, so I'm not worried about bad policy resulting in another housing bubble.
    4. This is a bi-partisan issue. President Bush said just because you're poor it doesn't mean you can't buy a nice house. There's no reason to focus the blame on Obama.

  2. Disagree about #2; part of the problem with lending in the bubble was that is was partially based on teaser rates and intro loan terms. It would be far too difficult to legislate all the possible combinations to prevent abuses with teaser rates and variable payment terms; it's far easier and less loophole-prone to just legislate the total loan amount relative to reported income, both of which are easily known quantities.

    I'm also not as worried about another housing bubble as something else (at least immediately), but that's no reason not to put at least one brain-cell of thinking toward actually addressing the problem for the future, something neither the current nor the previous administration/Congress seems capable of doing. There's certainly enough blame to go around, although currently it's piling up squarely on the Democrats, especially since they are nominally the party of "consumer protections".

  3. How about we reinstate the restrictions that the Bush Administration removed on banking and home lending?

    BTW, Socialist power grab. That's the funniest thing I've read all day. This is a parody site, right?