The Mortgage Mess Starts Now

Andy Snyder|April 17, 2023

Oh boy… California is at it again.

It just launched a dangerous new program – the California Dream for All Shared Appreciation Loan program.

It’s a disaster in the making.

Anytime an entity that can take your money at gunpoint promises to make your dreams come true… run.

It’s no square deal.

In this case, the state is teaming up with wannabe homeowners – the folks who can’t come up with a 20% down payment because of California’s many other asinine programs that have sent home prices to unaffordable levels.

Thanks to this new program, folks making less than $211,000 per year will be able to receive a loan that covers all closing costs and a 20% down payment.

And it’s free… 0% interest.

All the state asks is for the loan to be repaid by the time the home is sold or refinanced… and for a proportionate stake of any appreciation in the home’s value to be returned to the state’s coffers.

In other words, the homeowner gets 80% of all future appreciation and the state gets 20%.

The profits will go toward funding new loans (and feeding the bureaucracy, of course).

What could go wrong?

Perhaps, given the amount of space we have in these columns, we should ask what won’t go wrong.

A House of Cards

First of all, the program will cause a surge in demand. Suddenly, a whole mass of folks can afford 20% more house than they could before.

Guess how high home prices will surge?

And mortgage companies aren’t dumb. They’ll take advantage of the demand too.

They’ve got the state backing loans now, after all. Why not get a bit risky and a bit greedy? They’ll raise rates, make riskier loans and move to the beach before the house of cards falls.

Fortunately, the folks in California aren’t entirely dumb. They’ve allocated just $300 million to this pilot program. It’ll go quickly.

Hopefully it blows up fast… before the legi-critters in office can come begging for more vote-buying funds.

This is a great reminder of why things got so painful in the late 1970s and early 1980s. It wasn’t just oil and food prices that sent inflation surging.

There was a third leg to it all. It was perhaps the most painful piece, the piece that sent ripples across the financial sector for more than a decade.

The cause back then – rampant meddling from above – wasn’t all that different from what we’re seeing today.

Although they’d remained fairly stable through earlier fights with inflation, the rates paid to borrow cash for a home soared in the late 1970s and into 1980. Because they play such a large role in our economy, mortgage rates alone added nearly 4% to the nation’s surging consumer price index.

As rates ebbed and flowed in the early 1980s, they created tremendous volatility in the markets.

At some points, in fact, falling mortgage rates weighed so heavily on CPI that the monthly readings came in at 0%… despite overall inflation remaining alarmingly high.

Imagine how markets would react if Jay Powell raised rates even though the headlines proclaimed that prices were flat.

It’d be chaotic.

Folks in the ’70s who weren’t paying attention got burned by a decade of pain.

Don’t repeat their mistake.