I have a crazy idea that might bring stability to the housing market: limit lending to a multiple of verifiable income.
Let’s say Sacramento passed a law that said any amount loaned on a primary mortgage over 3 times verifiable income on the date of loan origination did not have to be repaid. Further, any other mortgage claims which exceed 90% of property-tax value or one years verifiable income did not have to be repaid. What would happen?
IMO, the first thing that would happen is that lenders would stop lending insane amounts of money because there would be no obligation for repayment. This would effectively limit house prices to a multiple of income plus available savings. Exotic loan terms would not matter because the total amount is capped. Plus, the “verifiable income” provision would immediately eliminate all “liar loans.” Since the only way to get ahead at that point would be to save to increase a downpayment, people would actually start saving money. The limitation on total mortgage obligation would eliminate the 80/20 loan and ensure homeowners had some equity in the property ensuring foreclosure rates would remain low. Plus, by limiting this to “property-tax value,” people would be unable to take out HELOC’s to spend their equity once prices began to appreciate. Proposition 13 would force people to save.
If something like the above were passed today, it would be the apocalypse for the housing market; however, if something similar were put in place after the coming crash, we could ensure home price stability for years to come.
