Should Mortgages Go Back to the Future?

Victor Davis Hanson is usually thought-provoking:

I Guess We Forgot the Laws of the Past

There used to be certain laws about mortgages, wisdom slowly acquired through past boom and bust cycles of American history. You got a fixed, usually 30-year mortgage. You paid 20% down. And you bought a house whose debt payments did not eat up more than 30-40% of your monthly income.

Tales of wild real estate riches and speculative profits, even if true, meant little, since a home was more than just an investment. Somehow all that was forgotten with no or little down payment loans, adjustable-rate or interest only schedules, and excess purchased square footage.

Apparently the idea was either to appreciate yourself into 2nd and 3rd mortgage equity, or to expect interest rates magically to go down and thus lower payments, or to buy and sell/buy and sell yourself into a mansion. So the house of straw is now tragically collapsing, and the old wisdom of the past being relearned.

From the abstract of "Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market" (Public Policy Discussion Paper No. 06-6) by Kristopher Gerardi, Harvey S. Rosen, and Paul Willen from the Boston Fed:

The U.S. mortgage market has experienced phenomenal change over the last 35 years. Most observers believe that the deregulation of the banking industry and financial markets generally has played an important part in this transformation...This paper develops and implements a technique for assessing the impact of changes in the mortgage market on individuals and households.

Our analysis is based on an implication of the permanent income hypothesis: that the higher a household’s future income, the more it desires to spend and consume, ceteris paribus. If we have perfect credit markets, then desired consumption matches actual consumption and current spending on housing should forecast future income. Since credit market imperfections mute this effect, we can view the strength of the relationship between housing spending and future income as a measure of the “imperfectness” of mortgage markets. Thus, a natural way to determine whether mortgage market developments have actually helped households by decreasing market imperfections is to see whether this link has strengthened over time.

We implement this framework using panel data going back to 1969. We find that over the past several decades, housing markets have become less imperfect in the sense that households are now more able to buy homes whose values are consistent with their long-term income prospects.

The full text is available at the above link.

Excesses and malfeasances should be corrected and their recurrence should be disincentivized, but let's not throw out the baby with the bathwater.

The possessions that pioneers loaded on their prairie schooners were important--not just for survival, but to create a new and better future. So, too, the lessons of history are important.