Kashkari: So, let's unpack what you just said because there's a lot in there. FHA, the Federal Housing Administration, makes loans to Americans with as little as around 3% down.
Questioner: Three and a half.
Kashkari: I thought it was three.
Questioner: No, it changed this year.
Kashkari: Okay, and people would argue that that's risky, and that's a fair point. The point of FHA is to try to provide -- especially for first-time home buyers, the ability to get in to buy a house. People legitimately say, "Gee, isn't that risky?" That's a fair point. So, we are taking a risk, as people are buying new homes, their first time. At the same time, we have to strike a balance here. Because if we raise underwriting standards so high that most people cannot buy homes, it's going to put even more pressure on the mortgage markets. One of the things we had to do last year -- we've spent a lot of time last summer designing programs to stabilize Fannie and Freddie. That was absolutely essential, because we needed to keep credit flowing to the housing market.
We have a necessary housing correction. Home prices need to adjust back down to where ordinary people with regular jobs can afford to buy a home in their neighborhood. Okay? It's fundamental affordability. That could be an overcorrection, or it could be a very disorderly correction, if the flow of credit to the housing market dries up. And if you own a house but you can't sell it, because no one can afford to get a loan, what's the value of that house? It ends up plummeting. And so ensuring that the government was there to provide credit to keep the housing market functioning was very important, to allow the correction to progress while trying to minimize damage to the economy. So, I take your point on FHA. If you look at virtually every private sector source of housing finance, underwriting standards have taken off. Okay? You don't see that?
Questioner: No, because -- your toxic assets -- you bought loans that originated before March of '08, right? That's -- we're buying with TARP funds. Until January of this year, if you've got a lender like Bank of America lending without any income documentation, you've got the same problem that's going to happen or manifest three years from now.
Kashkari: Well, I'll have to defer to you on whether Bank of America or any other lenders were offering no-doc loans in January of this year.
Questioner: Until January 17th of this year.
Kashkari: I'll just be candid with you. I've heard the complete opposite from everyone else that I've spoken with, including the banks, and including people trying to get loans. More often than not, the calls that I've been getting are, "I can't get a loan. I've been perfect in my credit score, I made every one of my payments, and I can't get a loan, and my bank just pulled my credit line." So, you're one voice, when there are hundreds of others in the other perspective saying that banks are tightening standards too much. Markets are pretty efficient after they've made a mess, right?
So, more often than not, people are saying that banks are being too tough right now. And what I say to people is that -- as I mentioned in my talk -- in recessions, underwriting standards tighten, and borrowers get more nervous about taking on new loans, so you see credit levels falling. We want markets to find the right balance. We don't want them to be too loose right now. We want people to be able to get loans. But we also want them to be prudent. I don't have a better answer for you than that. I'm surprised, because what I was hearing is that -- you know, the crisis really reached a fever pitch around Christmas-time of '07, and underwriting standards at most banks had really ratcheted up at that point, especially in housing markets. Now, it's the other classes of loans, where people are continuing to tighten standards.
Questioner: You spoke earlier about the need to de-leverage. But the TALF program itself is just another form of leverage. So, isn't it just this cycle? You're just moving leverage from the banks onto private investors' balance sheets.
Kashkari: Well, in this case, we're moving leverage to the federal government's balance sheet. So, again, this is all about the nature of the adjustment. We need to de-leverage, but what's the speed at which that de-leveraging takes place, and how damaging is that de-leveraging process to our broader economy, while we reach equilibrium? So, if the government -- if the Fed and Treasury did nothing, markets would find their own equilibrium. But it could have been incredibly damaging to our economy while they got there. So, programs like the TALF are trying to provide a more graceful approach to those new equilibriums. Things like the TALF are designed to be very expensive, relative to what normal market conditions provide. The cost of that leverage, as an example. So that when markets begin to heal, those programs will unwind themselves, and the private sector will return to using their other sources of leverage.
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