Pittsburgh Tribune-Review’s Bill Steigerwald posted a great Q&A interaction with Heritage housing expert Ron Utt this weekend. Excerpts include:

Q: Is this subprime mortgage lending crisis sort of the final extension of this idea of liberalizing home buying? Is this what we get when we push it too far and make it too easy for people who shouldn’t really be borrowing to buy a house to get a house?

A: Exactly. Until the mid-1990s there was not much of a subprime market because subprime borrowers were largely excluded. No one wanted to lend them money. A subprime borrower is by definition somebody who has a FICO score below 660. From 660 it keeps on going down. These are people who have had a variety of credit problems in the past. They’ve either filed for bankruptcy or they have missed numerous payments on various obligations and so on and so on. The thought was that we know exactly what these people are because we are the ones who have lost on them in the past. But the notion was that with rising home prices and higher interest rates on these loans that we could offset and compensate for the much greater risk that we were taking on.

Q: If you could wave a magic wand, what would you do to end the crisis? Or do you just let it unravel?

A: I don’t have anything specific, but what we have to recognize is that in 1995, the homeownership rate was a little bit below 65 percent. That’s essentially where it had been in the 30 years up to that point. In 2004, thanks to the subprime market, it reached 69 percent, and that was a homeownership rate that was sustainable only through fraud and risk and irresponsible lending activities. Now that we’ve returned to normal credit standards — and that is you actually have to prove you can pay back the loan in order to get it — we’re going to be drifting back to the 64 percent or 65 percent homeownership rate. That means that over the next couple of years, somewhere between four and five million people who are now homeowners are going to be “un-homeowners.” … What Congress is essentially trying to do … is to figure out how can we sustain that 69 or 68 percent. And the only way you can do that is by perpetual bailout because we simply got to that rate by allowing unqualified people to become homeowners.
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Another side problem of the subprime market is that by bringing so many new people into the homeownership market, you had this frenzy of buying. And in many communities — particularly communities that had very abusive zoning rules that limited supply, like San Francisco, Southern California, Florida, Nevada and select metropolitan areas — the prices went through the roof. And through abusive land regulations you had created an affordability crisis. What we need to do is begin the process of unraveling so that housing becomes more affordable to people but at the same time those people for whom it is more affordable will also be people who are qualified to borrow the credit and likely to pay it back. So you are working your way back to a more normal and more sustainable and stable housing market. But that’s going to be an awkward transition.