Housing reform for the long term

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The Federal Housing Administration, which has been propping up the residential real estate market in a major way, announced this morning that it would tighten its lending standards. The FHA has been doing a lot to clean up its books—which do need cleaning up. Raising down payment standards, though, isn’t expected to have much of an effect. As Reuters writes:

The FHA is raising its minimum credit score for a 3.5 percent down payment to 580 while scores below that level would be required to have 10 percent down. But most FHA lenders won’t lend to anyone below 620 so it’s unclear how many borrowers would really be affected by the down payment change.

Still, this is a good change.

Why? Because at some point, lenders will start going after the lower end of the credit spectrum again. In the era or re-regulation, it’s easy to react to the details of the crisis we just had. But the next one will look different. So falling back on tried-and-true rules of thumb—like having to pony up more cash if you’re a bigger credit risk—sounds like a great plan to me. Instead of designing super-specific changes to prevent what just happened from happening again, let’s think about what the system should look like more fundamentally and then try to build that.

We might not see the benefit immediately, but I imagine some day we will. As long as we don’t go changing our standards again once the enthusiasm returns.