FHA Encourages More High-Leverage Loans

From the Wall Street Journal:

The Trump administration is vastly expanding the scope of condominium purchases eligible for lower-down-payment loans. The move, to be announced Wednesday by the Federal Housing Administration, could help revive the entry-level condo market for first-time buyers because FHA-backed loans require only a 3.5% down payment and lower credit score than conventional loans.

It also loosens financial-crisis-era rules and could expose the government to a higher likelihood of loan default if the housing market continues to slow and prices fall.

What could go wrong?

In fairness, the housing market is nowhere near the bubbly levels of the aughts, and there’s no special reason to expect a big crash. But a little crash? That’s entirely possible.

I’m something of a leverage obsessive, and I’m generally willing to put up with a lot of weird financial stuff if only the various arms of the government keep leverage under control everywhere and at all times. We mostly think of this in terms of banks, but it shows up in all sorts of places. Minimum requirements for buying stocks on margin, for example, or down payment requirements for homes. If the FHA wanted to loosen credit requirements a bit, I’d probably shrug if they’d pair it up with a 10 percent down-payment requirement. That would change the leverage from 27x to 9x.

But that’s not to be. After all, the financial crisis happened more than ten years ago. Things are totally different now, right?

HERE ARE THE FACTS:

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ONE MORE QUICK THING:

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