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Government Is Encouraging Lax Lending Standards
...First came the Federal Housing Authority inspector general's report [pdf] on the FHA's lender approval process, which found that FHA was missing or ignoring relevant information, failing to document loans, not preventing convicted financial criminals from participating in its lending program, and in most other ways failing to "ensure that lenders met all applicable requirements." The IG's spot check revealed, for example, that just one out of 22 approved applications contained all the documentation needed to meet the FHA's own standard for guaranteeing a loan.

The FHA's much more serious offense against lending standards -- its dangerously low 3.5 percent down payment minimum for guaranteed loans -- became the focus of attention this month when the authority admitted it was shown to be close to bankruptcy, and Rep. Scott Garrett (R-New Jersey) introduced legislation to boost that minimum to 5 percent. ...

...While all economic indicators, from rising unemployment through rising mortgage defaults, describe a market in collapse, real estate prices continue to increase. The Case-Schiller August index, announced today, was up 1.2 percent. The National Association of Realtors (NAR) is celebrating a 9.4 percent jump in existing home sales. This Goldman Sachs report issued last week concludes government largesse is adding a full 5 percent to current real estate prices.

How are people buying all this expensive real estate? With nearly the same ratio of debt to down payment as they had in 2005. According to NAR, the median down payment is 4 percent -- slightly above what it was earlier in the decade -- but a third of all U.S. houses are still being bought with no money down.

That's a bad bet for us, because we will be on the hook for the defaults. As this San Francisco Federal Reserve report notes, nearly all mortgage securitization is now being done by the nationalized government sponsored enterprises, and virtually none by the private sector. So lenders are not just gambling on bad credit risks, but gambling with your money. Not surprisingly, it's the administration that gets the benefit, as real estate prices, in marked contrast to unemployment, are doing better than the most-adverse projections of the bank stress test conducted earlier this year. (Calculated Risk compares the trendlines.) ...