When Policy Creates Stupidity

David Stevens, HUD’s Assistant Secretary of Housing and Federal Housing Commissioner, basically the head of the Federal Housing Administration, has drawn a line in the sand against legislation increasing the minimum downpayment for an FHA loan from 3.5% to 5%.

This is the same FHA, that has had its reserves sucked dry by increasing defaults on its mortgage (here and here), and now they are fighting against making their loans less likely to default.

The reason given? That, "limiting the pool of eligible home buyers could dampen a fragile housing recovery."

This is an extension of two largely bipartisan policies:

• The federal government has been pushing home-ownership aggressively for decades.
• A desperate attempt to re-inflate the housing bubble.

Both policies have proven disastrous, but decisions are still being made on this basis.

It should be noted that this is the same FHA was spitting in the face of sanity for some time by allowing "seller funded downpayment assistance loans", where the seller raised the price of the home in order to lend the buyer the money for the downpayment (!). It was called the Down-payment Assistance Program (DAP).

This procedure is one of the reasons that they are in a pickle now, because it made it too easy for people who could not afford house payments to buy a house.

Thankfully, Congress made this illegal, and they are now looking at a further tightening of lending standards, but just as in the case the DAP, they are fighting the change tooth and nail.