Arnold Kling  

Beating the Dead Horses

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A while ago, Cato asked me to explain Freddie Mac, Fannie Mae, and what to do about them.


In this briefing paper, I will suggest ways that Congress could gradually extricate housing policy from its dependence on the GSEs. While it may be too late to insulate taxpayers from the risks embedded in the GSEs’ current portfolios, it is possible to shrink the GSEs without significantly damaging the housing market.

The publication was due out this week, and we decided that nothing that took place over the weekend required any edits. I just re-read the paper by the way, and I think it's pretty good.

I recorded a podcast this morning for Cato, and I will add the link to this post as soon as it is available. [UPDATE: the podcast is pretty decent, in my opinion, and it's only about five minutes.] I think what I'd like to see boils down to this: good old-fashioned mortgages, with good old-fashioned down payments, issued by good old-fashioned banks. Then let the chips fall where they may in terms of foreclosures, house prices and the rest.

The more I think about it, I see this weekend as the culmination of a long struggle pitting ordinary civil servants at the Fed, Treasury and the agency in charge of GSE regulation against the top management of Fannie and Freddie. After years of getting rolled by the GSEs' heavy-handed lobbying, the civil servants finally extracted a measure of revenge. But in terms of the future shape of the mortgage market, this weekend really resolved nothing.


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COMMENTS (2 to date)
Nick writes:

When my mom sold her house here in Idaho, she was offered $20 more than what she asked for. Looking astonished, the realtor proceeded to inform her that she would use the $20K to pay the down payment on the buyer's loan. This, of course, smacked of finacial fraud to my poor mother's frail sensibilities, but it turns out this is perfectly legal here in the Gem State. I think it's called a Jeremiah program. If I didn't have to pay my own down payment, and then the value of my house dropped 20%, I'd probably default too.

Matt writes:

Yes, I agree.

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