But leverage is everywhere, not just on Wall Street. If you buy a house with 20% down, you're employing leverage of 4:1. At 10% down it's 9:1. At 5% down it's 19:1. At the FHA minimum of 3.5%, it's 27:1.
That's too much. Just as leverage much above 10:1 is dangerous in the banking system, it's dangerous in the home mortgage market too. If 10% had been the minimum down payment over the past decade, the housing bubble never would have taken off the way it did. Crazy loans would have been rare. Unqualified buyers would have continued to rent. Mortgage fraud would have been dramatically reduced. Speculation and flipping would have been dampened. Foreclosures wouldn't have decimated entire cities. The derivatives market wouldn't have reached such stratospheric heights. We still might have had a medium-sized housing bubble, but the world probably wouldn't have been on the verge of imploding last year.
We should limit leverage everywhere: in the real banking system, in the shadow banking system, in hedge funds, and where it's baked into derivatives. But we should also do it at the individual level: mortgage loans, car loans, and credit card loans. The point is not to cut off credit, but to do what we can to ensure that it grows steadily and sensibly, not catastrophically. A minimum 10% down payment to buy a house is a place to start.
I get the point, but it's important to keep in mind that the 3.5 percent FHA amount is for first time home buyers like I hope to be early in 2010. There are loads of responsible people who plan to live in the home that they buy at 27:1 leverage and have figured out how to make the monthly payments. Punishing all home buyers to curb the behavior of speculators and "flippers" would be really unfortunate.
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