July 31, 2013
A Washington Post piece on the future of Fannie Mae and Freddie Mac allowed the debate to be framed by Ellen Seidman, a senior fellow at the Urban Institute:
“‘You’ve got an ideological right that wants no government guarantee at all, except grudgingly through the Federal Housing Administration,’ she says. ‘And you have sort of everybody else wanting some sort of guarantee.'”
Actually, I wouldn’t fully fit Seidman’s definition of the ideological right because I would be happy to have Fannie and Freddie continue as essentially government owned companies. This is a case where there are economies of scale in having one or two actors as the secondary market and no problems of moral hazard in a context where all the profits go to the government.
However, there is a good argument for leaving the market to the private sector if it is not politically feasible to keep Fannie and Freddie in their current state. Devolving to some sort of convoluted mix of private banks with public guarantees both raises costs (come on folks — put on your economist’s hat, we do not want a lot of money being made in mortgage finance) and problems of moral hazard.
Will our regulators be able to ensure that the banks issuing mortgage backed securities aren’t able to offload risk on the government? Not in any world I’ve seen.
It would be worth taking the risk if there were some important end being served, but what is the end here? People will still be able to get mortgages without a government guarantee and they will even be able to get 30-year fixed rate mortgages. (Ever hear of the jumbo mortgage market? There are 30-year fixed rate mortgages there and no government guarantee.)
Mortgages will cost more absent a guarantee. So what? The subsidy of lower cost mortgages goes disproportionately to people who take out bigger mortgages, in other words better off people. Now that’s a great government program, it gives more money to higher income people than lower income people. You would have to be a right-wing ideologue to oppose that one.
We already subsidize home ownership through the mortgage interest deduction. If we want to increase the subsidy we can make the deduction more generous. This would also allow us to target the subsidy better.
The sort of public-private mixes advocated by Seidman’s “everybody else” are about subsidizing mortgage backed securities, not homeownership. And as much as I hate to disagree with the Washington Post, I don’t think opposing government subsidies for mortgage backed securities puts me on the ideological right.
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