Government still trying to re-inflate the housing bubble

The minimum down payment for a mortgage guaranteed by the Federal Housing Administration (FHA) — which is now guaranteeing nearly 30% of new home loans, up from 3% in 2006!!! — is 3.5%!!!

Anyone who can put up only 3.5% of the value of the home they’re “buying” has no business “buying” that home.

Haven’t we all learned how dangerous “leverage” can be, especially in a world with over 10% unemployment???

A 3.5% downpayment means the government is allowing lenders to lend — risk-free — to borrowers with a debt-to-equity ratio of 27.5!!! That’s insane!

It’s even more insane when you realize how hard it is to determine the “fair value” of a home today or what that home might sell for two years from now.

Given the large inventory of homes on the market today (because most sellers are refusing to lower prices to market-clearing levels), many homebuyers today are probably paying too much. If someone puts down 3.5% but overpays 5%, their house is underwater before the ink dries on their contract.

Posted by James on Thursday, December 03, 2009