NEWS BLOG (WSAU) President Obama talked about “having skin in the game” during the health care debate. Everyone would have to give up something to reach his goal of broader health care coverage for all. It was considered a negative comment. The ‘haves’ don’t want to give up a lot of skin for the ‘have nots.’

There is an area where having skin in the game is good. But the government continues to push against it, in the name of feel-good policies that don’t really work.

It’s good for a homeowner to have skin in the game with the real estate they own. More people having more skin in the game would have made the housing crisis over the last two years not as severe.

Here’s an example. A traditional fixed-rate mortgage used to require a 20-percent down payment. If you wanted to buy a $100,000 home, you needed $20,000 of skin to get into the game. This came with benefits. Someone who can scrape together $20,000 has demonstrated their financial responsibility. They are savers, not spenders. They’re less likely to be mired in credit card debt. They probably have a steady job. They’re a much lower credit risk for lenders.

Now suppose the housing market takes a tumble like it did in 2008. Some homeowners find themselves underwater, where they owe more on their house than it’s worth. A homeowner who’s already put $20,000 down will ride out the downturn. They don’t want to lose the money they've already put into the property. They’re less likely to dump their house or turn the keys back to the bank and walk away. More homeowners toughing it out keeps a downturn from becoming a rout.

But a homeowner with a no-down or a low-downpayment mortgage has no motivation to keep their home through a downtown. If they got the house with a $1,000 down payment, their losses for vacating their house and renting somewhere else is almost nothing. And in a down market, they may be able to rent for substantially less then their monthly mortgage payment. These are the homes that become vacant, go into foreclosure, and force property values down for everyone.

WHEDA has been pushing a new home-loan program in Wisconsin with $1,000 down, backed by Fannie Mae. These are the kinds of programs that creating housing bubbles by giving homes to people with no skin in the game. This was the lesson of the 2008 housing market collapse. It's a lesson that we've already forgotten.

Chris Conley
Operations Manager-Midwest Communications, Wausau
4.16.10