Steve Chapman just blew my mind. Here I am, minding my own business, sipping my chewy gas station coffee, reading the Tribune, and there's Steve Chapman's face. Steve Obama-Apologist Chapman. Normally he writes things about how everyone who doesn't like Obama is racist, and other hard hitting pontifications. But for all of Chapmans left leaning commentary, he does get a point or two in my book for calling out mistakes that Obama is making as he struggles to make Jimmy Carter look like a strong president. In today’s Tribune, Chapman writes something that I've been writing about for the past year. He tackles the issue of mortgage, and from a decidedly conservative position, talks about the reasons behind foreclosure, and what the current administration is doing to further ideological views on housing that have nothing to do with the reality of a marketplace.

Mr. Chapman's article, Mortgage Madness-Again, sounds frighteningly similar to an article I just wrote a few weeks back about how current Obama policies are based on fairy tale (President Clinton's words, not mine) beliefs, not on sound economic principals that should have been easily learned over the past 36 months. While my article was picking on the infusion of money into the HFA's, Chapman is discussing the FHA problem. A quick primer on the FHA.

This government agency is an insurer and originator of loans. Unlike many loans that require 10-20 percent in down payment, FHA loans for primary residences only require a 3.5 percent down payment. They are, in essence, cheap loans. The FHA is currently insuring 400 percent more loans than it was insuring just a couple years ago, which is a serious sign that people are once again opting for cheap money with very low down payments. Those cheap loans with small down payments are exactly the sort of loans that dragged us all in to this mess, and instead of learning from the mistake of easy credit, as the open market is doing, the government is replicating the exact scenario from the previous decade with their head glibly buried in the sand.

It's amazing really. The administration that promised so much, is failing to deliver on the most simple of economic policies, and even Mr. Chapman is calling them out for it. Most interesting to note in the article is another point that I've been making over the past year. The issue with high loan to value mortgages is that a slight correction in housing prices can cause the homeowner to be "under water" with their loan. A quote from Mr. Chapman's article that may as well have been straight from my computer screen to his...

...One dip in the economy, and the house is worth less than the mortgage. That's an invitation for the owner to stop paying, drop the keys in the mailbox and find a place to rent- an invitation hordes of people have already accepted. What most foreclosures have in common is that the mortgage holder owes more than the property could sell for. "Not everybody who has negative equity goes into foreclosure, but nearly everybody who goes into foreclosure has negative equity", says Paul Willen, an economist at the Federal Reserve Bank of Boston.

See what I've been telling you? The problem hasn't been predatory lending, or confusion over terms of loans as many pundits cite, the problem is negative equity. Now, if you bought a home 5 years ago in Marco Island for $1MM, and funded that purchase through an 80 percent loan, and your home is now worth $700k, you have negative equity. Your negative equity is not your own making, as you were responsible with a down payment, and the market just adjusted too quickly for you to get out with your Tommy Bahama shirt on. But if you bought that same home with an 80/15 loan, and had a note of $950k, you were probably boasting some serious negative equity pretty quickly. It's the low down payment loans that welcome negative equity, and it's the negative equity that's behind nearly every foreclosure.

What the FHA can't see is that the goal of home ownership just isn't a goal that everyone should have. On the surface, a government agency lending with more attractive terms than the open market can seem like the "fair thing to do", but in reality, it's another huge mistake that is only going to serve to lengthen the foreclosure boom. The free market learned their lessons from this mess, and that's why conventional loans through conventional sources are significantly harder to secure than they were a couple years ago. Like a kid who burned his hand on the oven, the free market now recognizes the risk of low down payment loans, and wants nothing to do with them. The government also burned it's hand, but just went to the store for a better oven mitt.

David Curry is a Realtor in Lake Geneva, WI. He blogs at www.genevalakefrontrealty.com/blog.