Should the government decide who gets a mortgage?
One way to cut back on mortgage defaults would simply be to have the government regulate who could get a loan and who could not.
If a home payment would be more than 25 percent of someone's gross income -- no loan. If the house a person wanted to buy was in a region where home prices were still falling more than 1 percent a month -- no one would be allowed to get a mortgage. If the government thought there was a 20 percent chance that someone might lose a job because of the company or the industry where he worked -- no home loan.It would impose a radical set of restrictions on a free banking and mortgage system, but it would probably cut down on delinquencies and defaults over time.
The idea may not be so far fetched. The U.K. is considering significant restrictions on banks that are in the business of making home loans. According to the Observer, "City watchdog the Financial Services Authority (FSA) is preparing a clampdown on risky mortgage lending by placing limits on the size of the loans offered to British home buyers in a hard-hitting review of banking rules."
The plan might seem clever and might appear like a good model for the U.S. government to consider -- but it is not. Any regulation that restricts who can buy a home also takes demand out of the housing market. While restricting loans could slightly limit mortgages that might go into default, if would also help the price of housing to continue to fall. The U.S. economy needs every potential home buyer in the market to feel that he can get a mortgage if he can afford one and his bank agrees.
The U.K. plan is no model for the U.S.
Douglas A. McIntyre is an editor at 24/7 Wall St.