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Swagel on Mortgage Finance

A Question for Brad DeLong... What is a High Mortgage Defaul...

Phillip Swagel writes,

The longer Fannie and Freddie stay in government hands, the more likely they will become permanent wards of the state. This would be the worst of possibilities, yet it becomes more likely as conservatives push for a supposedly private housing financing system that has no hope of enactment. The government will always be part of the housing market; let's make sure we keep its role as small and contained as possible.

I have to say that I disagree with just about everything in his essay. First, I do not see why government needs to subsidize mortgages at all. If what you want is a more stable housing market, then let people put in larger down payments. If what you want is for poor people to be able to afford good housing, then give them housing vouchers.

And if you insist on having government-subsidized mortgages, then for gosh sakes, do not set up a whole new system of 5 entities to be subsidized. If you think that inexperienced institutions with inexperienced regulators are an improvement over Freddie Mac and Fannie Mae, then you are fundamentally over-confident about policy-wonk expertise.

For a more extended take on this argument, see my Mercatus paper.

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Thomas DeMeo writes:

If we were starting with a clean sheet of paper, much larger down payments would improve stability. In the current context, it would cut demand significantly and cause a disaster.

We need policies where housing prices remain within reasonable bounds. We can't have a system where we have swings like this. Larger down payments provide financial protection for lenders, but the loss of equity is still absorbed by the homeowners and that damage to the larger economy is the more important factor.

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