The government's recent loosening of mortgage requirements could end in a credit crisis, says Alan Schwartz, CEO of Bear Stearns when it collapsed from the sub-prime mortgage debacle in 2008.
The U.S. Federal Housing Finance Agency (FHFA) announced this month that it plans to reduce down-payment requirements on guaranteed mortgages to 3 percent from 5 percent to spark the sagging home market.
That could prompt a credit boom, just like the one prior to the 2008 meltdown, Schwartz told CNBC.
"When you give credit to people with very low down payments, and they can walk away from their mortgage; that is sowing the seeds of the next cycle," said Schwartz, now executive chairman of Guggenheim Partners.
"The U.S. economy became extremely dependent on credit, and there is a desire to go back to being very credit dependent."
He also maintains that deflation is the biggest threat to the world economy. "Deflation is rearing its ugly head again, and we still have not conquered it."
As for looser government standards on mortgage loans, MarketWatch columnist David Weidner is concerned, too.
"The government is essentially saying: 'Go ahead and lend; we’ll hold the paper,'" he writes. "But in trying to ease credit and turn a mythic housing recovery into a real one, the FHFA may be overreaching."
And why is that? "You know exactly who’s going to be taking out those loans," Weidner says. "People who can’t afford them. . . . You know how this new policy is going to play out."
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