Are the Bedfellows on the New Mortgage Rules Really So Strange?

Reducing access to credit is not some unwanted side effect of this law that we might get around with better policy design; it is the whole point of the law. We are demanding that banks retain a share of the loans that they issue because we think that otherwise, banks who securitize loans have too much incentive to make loans to people who will not be able to repay them... No matter how carefully your loan is underwritten, it is risky to borrow mortgage money with a 5% downpayment; even small movement in housing prices can wipe out your equity.

We would suggest that the proper way to provide welfare to those deserving of a chance of homeownership, but without access to downpayment capital, would be to specifically direct aid at them, not to distort the entire homeownership cost structure and risk premia. For example, charitable downpayment assistance programs exist; they could even be scaled up with government funding (at all levels) to compensate for the downdraft in housing and increased risk pricing.