So if a home that was $200,000 five years ago was $750,000 now, are you saying that’s not a problem as long as the banks give the person buying it the money regardless of their ability to pay it back? I don’t think you are saying that because you blame loose lending standards for the bubble. Or are you saying that there are plenty of people that could afford the current home prices, but the banks are simply being meanies and not loaning anyone the money? I’m going to assume you mean the latter.

Since you could be saying that you think prices are just fine right now and for some reason the banks won’t loan to anybody, I’d have to say I don’t think you’ve done any research to understand why that is. You say people can not meet the loan standards but you don’t say why you think that is. Have you asked yourself that question? Why can’t people meet the loan standards? And if so, what was your answer?

Banks are in the business of making money. They are greedy as hell and want to make as much money as possible. Banks make all that evil greedy money by making loans and charging interest on those loans. So why would a bank not want to loan money to someone who wants to take out a 30 year mortgage on let’s say a $250,000 house where the bank would make over $200,000 in interest? Are you saying the banks don’t want that $200,000? Are you claiming some sort of conspiracy? Are you saying banks are just mean?

The reason banks are not making mortgage loans is because home prices are too high for the average home buyer to afford and banks can no longer sell those loans to the government. The government IS why the housing bubble occurred and it was the retraction of government support as well as the implosion of MBS investments that caused the bubble to collapse. Did the big investment banks play a part? Absolutely. Is our government also on the hook as much, or even more so than the banks for starting this problem AND buying billions of dollars of bad mortgages from the banks and then putting the taxpayer on the hook to cover the losses? Absolutely. To say the government is not at all responsible for this mess is delusional. Not only did they buy billions of dollars in bad mortgages from the banks so the risk of loss was removed from the bank and transferred to the taxpayer, but The Federal Reserve kept interest rates extremely low which encouraged people to borrow that money. If the government had raised interest rates, it would have put a stop to the flood of loans and made it harder for people to qualify. It would have put a lid on this bubble.

The government did not do that however because they needed the housing market to support the economy that had started collapsing from the dot.com bubble. If you don’t believe that, then why does the government keep trying to prop up the housing market with incentives, credits, rebates, mortgage modifications, loan foregiveness, and allow the banks to ignore the mark-to-market rule of accounting so they can keep the value of the homes on their books at 2006 levels even though we all know they are all worth 30%-40% less? That’s because the government, in its stupidity, believes the housing market drives the economy. That is why they created the bubble, that is why they continue to try and prop up the bubble.

I write about this extensively on other posts in my blog, but I’ll give you an example. In Orange County, CA the average home price right now is about $429,000. The average income for someone in the O.C. is about $80,000 (median family income). Now the rule of thumb as far back as I can remember, and well before the bubble, was that you should not buy a home more than 3X your gross household income. That would mean that a family in O.C. should not buy a home more than $240,000. So how do you explain the extra $189,000? Not to mention that historically, banks required 20% down payments, which would be $86,000. Now, through most of the 00′s, the savings rate in the U.S. was between negative and 1%. In 2008 the rate finally creeped up to 4.2%. That means in the past 4 years, our O.C. family should have saved about $13,500, still $72,500 short on the down payment. At that savings rate it would take them 21 years to finish saving for the down payment. So what would you rather this OC family do? Find a bank that’s willing to loan them the money for this house even though the risk of default is extremely high despite the fact that they are an “average” income family trying to buy an “average” priced house? Or can you see that the “average” home price is STILL too high for the “average” family to afford without taking on substantial risk. A risk that banks are not willing to take on either.

The banks stopped loaning to the “average” family because they can no longer sell the loans to Fannie Mae and Freddie Mac and the investment banks. Banks were happy to make suicide, high-risk loans to anyone with a pulse, as long as they could unload the mortgage, and the risk with it, to someone else…and usually that was our government. Most banks did not even carry the mortgage more than 30 days before they sold it to the government. Some of them had the buyer pay the first month up front just so they could unload the mortgage immediately to the government passing all the risk of default to the taxpayer in a matter of hours and just being happy with the fee revenue. That is why even today, one of the largest buyers of mortgages is the government through the FHA. It used to be 3% in 2006, and soared to over 21% of loans in 2009. Some estimates put them at 1/3 of all mortgages now. Their lending standards are slightly tighter than the free-wheeling teaser rate negative amortization loans the banks were handing out like candy in the bubble…and they still require a down payment, a tiny one, and a decent credit score. I use the term “decent” loosely. But at least they verify income. That’s a plus.

So as to your concern about access to mortgage loans and the banks not participating in this, the FHA has come to save the day. The trouble is, the FHA is DOA. They have billions of dollars in losses, their reserves are below the federally mandated limit and they are hemorrhaging taxpayer money because the rate of default on an FHA loan is higher than a conventional loan (the kinds of loans the banks make but won’t because unlike the FHA, they can’t afford to hemorrhage because they don’t have the deep pockets of the taxpayer…banks will actually go out of business, unlike our government, even though I wish it would). That is why the banks are not loaning, but the FHA is. Prices are still too high, banks won’t take the risk of default, but the FHA will, and right up until today the FHA is losing billions in mortgage defaults for doing so. That is why the government is slowly raising the down payment requirements, and the FICO requirements….they need to reduce the number of defaulting FHA loans from people who STILL should not be buying these overpriced properties. If home prices were still not too high, then there would be little to no defaults on FHA loans. Prior to the bubble, a home mortgage was one of the safest loans a bank could make because they vetted the buyer to the nines, checking EVERYTHING…so there were very few defaults. So you have to ask yourself why we still have so many defaults even on FHA loans….because prices are STILL TOO HIGH for the average buyer.

So that is the reason why the greedy evil banks don’t want to make a half mil on a home loan. It’s not because they are mean. It’s not a conspiracy. It’s that they are now on the hook for the loan if it defaults, and they don’t want to cover that loss. A loss that was not their problem in the bubble when they could just toss it over and sell it to the taxpayer, but a loss they would have to take now. And since home prices are still too high, the banks won’t qualify anyone because the “average” person does not make enough for the “average” priced home which means…prices are STILL TOO HIGH.