The C.D. Howe Institute has just released a study showing that some demographic groups have taken on considerably more risk than others in the mortgage/housing market. I'm not surprised by the result, but I am confused by their policy recommendation. From their summary:
[T]he authors find that roughly 1-in-5 of mortgage indebted households have less than $5,000 in financial assets to draw upon in response to a loss of income or to higher debt service costs. 1-in-10 mortgage-indebted households have less than $1,500 in financial assets to address any shock. This represents an inadequate financial buffer, as average mortgage payments are more than $1,000 a month, before taxes and operating costs.
The federal government may want to consider further policy actions to lean against the shift towards significantly higher mortgage burdens. However, such policy measures should not be unduly heavy handed and should be targeted to address the distributional nature of the risks.
Here's a different take from me:
The federal gubmnt should tell mortgage lenders that if they grant high-risk mortgages to risky borrowers, they have willingly accepted the risks and must accept the consequences. The problem isn't with the borrowers (and their demographic divergences); it's with the lenders.
I realize the lenders themselves have a diminished incentive to assess the risks properly if they can fob the risks off onto the federal gubmnt through mortgage insurance programmes. If that is what the policy recommendation is addressing, it's about time. It is indeed time for the federal gubmnt to "lean against the wind" and tighten up the requirements for high-risk mortgages.
Let me add that as our incomes rise, we tend to spend more and more on luxuries (and McMansions undoubtedly fall into this category). It's not surprising, given rising incomes, that standards for mortgages and home-buying have changed. Fifty years ago people were advised not to buy a house if the monthly mortgage payments were more than double their monthly income. But now ratios of 4:1 and even 5:1 are common:
The portion of mortgage indebted households with a primary mortgage debt-to-disposable income ratio in excess of 500 percent has climbed from 3 percent in 1999 to 11 percent in 2012.
If private companies were insuring mortgages like those described in the above quotes, one would hope their stockholders would be all over them with objections, complaints, and proxy battles to get rid of the directors.