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To the Administration's Panel on Housing Policy. Off hand, here is what I would say.

1. Government support of secondary mortgage markets is the worst form of trickle-down economic policy. Many very wealthy people profit from it, and the benefits to low-income people are at best tiny.

2. The benefits of home ownership to an individual can include better housing and disciplined saving. We ought to re-think how those benefits can be achieved. For example, better housing might be achieved through vouchers that can be used either for rent or for mortgage payments. Disciplined saving requires amortizing mortgages where the borrower does not refinance to take cash out. I would argue that disciplined saving also includes a reasonable down payment. Buying a house with little or no money down represents speculation, not saving. However, in general, I think it would be best to think of disciplined saving as a goal totally separate from housing goals.

3. If mortgage interest rates were somewhat higher relative to other market interest rates, that would not be a bad thing. There is nothing wrong with steering a bit more capital into productive investment and a bit less into the housing market.

4. The thirty-year fixed-rate mortgage may not be the optimal instrument these days. The market might eventually evolve toward something more like the Canadian five-year rollover mortgage.

5. The housing finance lobby is a formidable and frightening force. The more the government stays involved in the mortgage market, the more active and effective this lobby will be.

Based on the foregoing, I favor a minimalist housing policy. Direct subsidies should go to low-income households to obtain housing. Fannie Mae and Freddie Mac should be phased out, by reducing their loan limits over a three-year period (a loan limit is the maximum mortgage amount for a loan to be eligible for Freddie or Fannie) and then a few years later selling off their portfolios. Government should make no effort to revive mortgage securitization. It might revive without government support, although I tend to doubt it. However housing finance evolves, regulators should carefully monitor the distribution of default and interest-rate risk within the financial system. The key is to avoid large concentrations of risk in highly-levered firms that might require bailouts.

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COMMENTS (3 to date)
Mercer writes:

" Direct subsidies should go to low-income households to obtain housing."

Why? I think a major factor in high home prices is zoning. There are many counties that will not allow trailer parks and severely limit the amount of land on which low priced apartments can be built. People in these communities then complain about the lack of affordable housing. If localities will not permit low cost housing to be built why should taxpayers pay for the lack of said housing? The is just a way to avoid looking at the consequences of restrictive zoning.

Gary Rogers writes:

Something I have noticed missing from my tax return for the last few years is interest income. It's not that I no longer have a savings account. My savings simply do not earn anything anymore because of the Fed's zero interest rate policies. How hard is it for the average working person to save up a down payment when savings accounts are such a bad investment? This brings up the whole issue of stimulus and how its whole purpose is to encourage consumers to spend rather than save. Isn't this directly related to the housing problem?

Disempowered Paper Pusher writes:

A 401k style savings account for mortgage down payments would be a good way to encourage disciplined savings.

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