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HeadSet says

My beef is that government backed mortgages are "easy" money. I don't see that at all.

The government backing frees banks to lend to people who would otherwise be considered too risky. That is, a bank would normally want a down payment and a home worth sufficient collateral before making a loan. With the government taking the risk of default, the banks can throw money around to non-savers and reckless buyers. Have you forgotten the price run ups in 2003-2008 caused by anyone who could fog a mirror getting a loan?

+1000 This is EXACTLY why gov't-backed loans distort the housing market.

HappyGilmore says

HeadSet says

he government backing frees banks to lend to people who would otherwise be considered too risky. That is, a bank would normally want a down payment and a home worth sufficient collateral before making a loan. With the government taking the risk of default, the banks can throw money around to non-savers and reckless buyers. Have you forgotten the price run ups in 2003-2008 caused by anyone who could fog a mirror getting a loan?

That's nonsensical. Banks loan out money as an investment and only do so when their analysis shows it will meet an ROI and generate profits. They will not make unprofitable loans just because they have additional money.

The bubble was caused by poor understanding of risk and outright fraud.

Happy - sorry, but you're wrong on this one. If the government backs the loans, banks will absolutely take a more risky approach to loans because downside risk is limited, while upside is there.

HappyGilmore says

HeadSet says

The government backing allows too much easy money which is what drives up prices. Without government backing, the irresponsible borrowers would not be able to bid up prices. The only people in the market would be people who saved up the down payment and then the houses would be affordable enough to buy with a 10 -15 year loan.

All that would do is create more landlords and higher rents. That would increase inequality and hurt the middle class. Housing prices would not fall much because anybody who is no longer a buyer becomes a renter and drives up the rental cost. This means investors can and will pay more for housing.

Government backed loans do not keep deadbeat borrowers in their homes (nor would it be fair if they did: what would be the responsible people who do not chase mania? chopped liver?). They still get foreclosed; the lenders/banks get paid by the government backing/put. Encouraging people who are not financially responsible to buy homes end up becoming a way of ripping off the down-payment money from the lower middle class at economic cycle peaks. It's the same as when government encourages women and minority to buy stocks at the stock market cycle peaks.

HappyGilmore says

That's nonsensical. Banks loan out money as an investment and only do so when their analysis shows it will meet an ROI and generate profits. They will not make unprofitable loans just because they have additional money.

Banks typically originate loans and sell them to government-sponsored enterprises (GSE) such as Fannie Mae and Freddie Mac. The banks don't care if they are bad or unprofitable loans since they sold to someone else who is ultimately responsible for them. Private money lenders and other lenders who actually hold the loans they originate will be much more concerned with the quality of loans they are making and the current state of the real estate market.

A major reason for the real estate crash in 2008 was due to banks making terrible loans and then passing them off to other entities. Make the commission then sell off the garbage loan.

Reality says

It's the same as when government encourages women and minority to buy stocks at the stock market cycle peaks.

I am neither woman nor minority, but my retirement fund manager was haunting me just before market crashed telling that I should immediately buy stocks (I am in bonds now). I wonder how he could have timed the worst time to buy with such precision...