And you thought things couldn't get worse on the housing front. The U.S. housing market is in the worst shape since the Great Depression, and now the Obama administration's solution is to impose new rules that would banish 60 percent of current homebuyers from the market.
The proposed Mortgage Qualification Rules are the result of legislation passed in the wake of the financial meltdown to ensure that mortgage-backed securities are based on high-quality loans. But the effect will be to disqualify millions of potential homebuyers.
Earlier this year, the six federal agencies tasked with drafting the rules added a requirement that homebuyers make a 20 percent down payment to qualify for low-interest mortgages. In addition, the new proposals announced this week would cap the amount of income that borrowers could devote to mortgage payments to no more than 28 percent of gross income. Worse, it would disqualify any borrower whose combined debt payments amounted to more than 36 percent of monthly gross income.
What does this mean in practical terms? In 2009 (the last year for which we have accurate data), median household income was just under $50,000. Under the proposed new mortgage rules, an average family would be ineligible for a low-interest mortgage if they owed more than $1,500 a month in payments for all their financed debt: mortgage, cars, credit cards, student loans, and anything else bought over time. And the mortgage payment alone could not be higher than $1,166, including escrow for taxes and insurance.
The proposed rules would put an end to the American Dream for much of the middle class. As Urban League president Marc Morial said, "Homeownership, as we know it, could be a thing of the past" if the proposed rules take effect.
But the damage extends beyond depriving individuals of the opportunity to buy a home -- it will ripple throughout the economy. There is no question that the depression in the housing market is costing jobs, and not just the obvious ones in construction. Part of what has made the American economy more resilient than other countries' over the years is the willingness of Americans to pick up and move when jobs in one area disappeared but were available in other places. But the inability of many people to sell homes has reduced American geographic mobility to historic lows.
The consequence is to keep those people who have lost their jobs, but own their homes, from moving to states where jobs are more plentiful. If they can't find a buyer because the government has made it so difficult to qualify for loans, they're better off staying put and collecting unemployment insurance.
There is no question that many Americans have become addicted to debt and live way beyond their means. But one of the best ways of determining whether or not someone can really afford his or her lifestyle is to examine credit history-not simply the level of debt. But these new rules would punish even those borrowers who have never missed a payment and have exemplary credit ratings.
It also treats income as if it is fixed over a borrower's lifetime. A relatively young college graduate may have significant debt from earning that degree, but his or her income is likely to increase substantially over the 30 years of a mortgage, and restricting access to a loan on that basis makes little sense.
And, of course, the obverse is also possible. Incomes fall as well as rise. Just because someone is earning a lot today doesn't mean he or she will be making the same amount next year or the following.
But the real problem with these rules is what they will do to the overall housing market. Without buyers, home prices will continue to plummet. There are already too many unsold houses on the market, about twice the number you'd expect in a healthy environment. And the administration's solution is to drive millions of credit-worthy buyers from being able to purchase them?
These Obama administration rules could turn what increasingly appears to be a double-dip economic recession into a full-scale depression. The president will pay politically for this disastrous policy -- but Americans will pay out of their actual pockets for his folly.