To me, when I hear people start pushing exotic mortgage products, we’re less than 2 years away from a banking crisis.
Reasons why Trump’s idea is bad:
- It doesn’t encourage home ownership (which is good) so much as home indebtedness (which is bad).
- It won’t make homes more affordable. Remember what jumbo student loans did to tuition prices? Same principle for houses. Adding leverage without adding capacity means they’re going to get expensive, a lot more expensive.
- It won’t help people who can’t get loans anyway due to bad credit.
- Equity will build so slowly that a lot of people will be tempted to just walk away if they can’t pay the mortgage. Easy credit plus high incentive to default – hello systemic risk!
The right solution to the housing squeeze is… wait for it… to build more housing. A sound lending policy might be government-backed zero-interest loans for construction of qualified residential housing. You get favorable terms for building, not for buying.
We can’t borrow our way out of the housing squeeze, we can only build our way out of it.