Gov't Programs on Housing, Lending Need Forethought

When the stock market crashed in 1929, the severe economic depression that followed over the next decade was prolonged unnecessarily by government policies such as the Smoot-Hawley Tariff and over-manipulation of the money supply, says Timothy Dwyer, founder and CEO of Entitle Direct Group.

Now, the wrong kinds of government interventions into housing could cause a protracted slump in real estate and the broader economy, Dwyer says. For example, Dwyer characterizes potential changes to the mortgage interest deduction and certain proposals around the qualified residential mortgage (QRM) as intrusions that would harm housing by preventing the market from clearing supply.

“Private equity firms are moving investment dollars into foreclosed homes,” says Dwyer, a former investment banker. “But I believe that certain government policies would inhibit that clearing mechanism.”

These proposals stem from good intentions — specifically, to avoid the overheating of the housing market similar to what happened in the earlier part of the last decade.

“In the period from 2002 to 2007, the pendulum swung very badly to a side where people who should not have been obtaining mortgages were by no-doc loans and no-income-verification loans,” Dwyer says. “All of those things allowed people who shouldn’t have had homes to buy them.

New government legislation and initiatives designed to prevent that from happening again may seem admirable, but possible unintended consequences — such as responsible, creditworthy borrowers being locked out of loans — need to be considered more than they are now. As the example of the Great Depression demonstrates, the wrong moves could produce stagnation and decline despite their noble intent.

“People should be able to purchase homes in this market, but they’re unable to because the credit markets seized up,” Dwyer says. “Now we have this overhang of [current and proposed] government policies that further impede creditworthy people from taking advantage of this market.”

By Brian Summerfield, REALTOR® Magazine