THE NATIONAL CONSTITUTION PROTOTYPE PROJECT

Residential Mortgages

The federal government should provide fixed-rate mortgages for owner-occupied, single-family homes on less than 1/2 acre. The loans should be available to all first-time buyers and to all repeat buyers who have not defaulted on a prior loan. The interest rate for such loans should be the same for all buyers (e.g., 3%) and should not be adjusted for "current market conditions" or a buyer's "credit rating". The loans should cover up to 80 percent of a home's estimated market value.

At time of issue, each government loan should, as a requirement for issuance, be accompanied by a second mortgage issued by an accredited private sector lender and mortgage insurance. The private sector loan should cover at least 15 percent of the home's estimated market value. The mortgage insurance should cover the government loan in full and remain in force for 5 years and should be provided by either the state or by an accredited mortgage insurer. The second mortgage should allow buyers to make equal payments for a minimum of 15 years and provide for interest-only payments if the buyer becomes unemployed.

Each state should be responsible for establishing regional caps on the amount of the federal government loans and for accrediting mortgage lenders, mortgage insurers, and real estate appraisers. Each state should also consider providing state-issued mortgage insurance as a substitute for private sector mortgage insurance.

States should be required to certify that all of the requirements for issuing a federal loan have been satisfied before the federal loan is issued. Note that if a state-accredited mortgage insurer is unable to pay off the federal government issued loan, the state should be responsible for the unpaid balance. 

An important goal of states would be to prevent excessive real property appreciation. Such excessive real property appreciation could lead to homes becoming unaffordable. Placing caps on the amount of each federal loan for different regions within a state could help prevent such excessive real property appreciation. 

The federal government loans should be restricted to citizens and permanent resident aliens. Borrowers should also be required to demonstrate they are employed full time and that their wages and/or salaries are sufficient to cover the payment of the federal loan. The federal government loan qualifications however should not include "ratio tests".

Note that the decision to lend someone money is a binary (yes/no) decision contingent on the lender's confidence that the borrower will honor the loan agreement. Charging a "risky" borrower a higher-than-normal interest rate does not in any way ensure that the borrower will honor the agreement; rather, it actually acts as a penalty to those allegedly "risky" borrowers who do ultimately honor their agreements. Consequently, if a higher-than-normal interest rate is charged a borrower due to a less than stellar "credit rating" (the buyer's "perceived" rather than actual risk to the lender), the borrower should, in theory, be entitled to a rebate of the difference in the total interest paid (based on the rate charge for their perceived risk versus their actual risk) when the loan is finally satisfied. But even better would be to simply forgo the charging of the higher-than-normal interest rate from the get-go.

Furthermore, loans that are secured by real property and are insured are virtually risk free to the lender. Fluctuating mortgage rates can produce significant risks to lenders and borrowers. And market bubbles often develop when the supply of lendable money expands in response to rapid appreciation in real estate values that are, in turn, driven by an expanding supply of lendable money. Thus, there is little if any reason for residential property lending to be provided by the private sector when the government can do as good if not vastly better job of regulating such lending.