Government-Sponsored Housing Market

by Stephen Spruiell

As promised, here’s a longer take on yesterday’s housing conference. The key bit:

This phrase “carefully designed” popped up again and again throughout the conference, as one speaker after another denounced Fannie and Freddie in the strongest terms, only to follow this condemnation with a solemn warning that the government must not let the GSEs’ irresponsible behavior give a bad name to the service they were designed to provide, namely, a subsidy for moderate-to-low-income homebuyers made possible by the implicit government backing the GSEs enjoyed. Speaker after speaker stressed that some more “carefully designed” government program must take the place of the GSEs in providing this subsidy — as if the government planners behind Fannie and Freddie had set out to create a sloppily designed mortgage subsidy.

Only a few participants in the conference had the temerity to note that the design flaw is intrinsic to the subsidy. AEI’s Alex Pollock was chosen to be the token conservative on a panel of industry special-pleaders such as PIMCO’s Bill Gross and liberal activists such as the Urban League’s Marc Morial. Pollock, to his credit, gave as good as he got. Pollock’s three-step plan for the future of housing finance? 1) Counter-cyclical lending standards, which would actually work to tighten credit risks as speculative bubbles started to form. 2) The reprivatization of mortgage securitization. Contrary to the claims of Bill Gross, the mortgage-bond trader who claimed that private investors would not step in to replace the GSEs in the secondary mortgage market, Pollock noted that the private sector was heavily involved in this market before the financial crisis and would probably return if there was money to be made. That means 3) No more GSEs.

Pollock found few takers for his plan, which was odd considering how many conference participants were eager to declare the GSEs already dead. Later, during one of the breakout sessions, it became clear that, while these specific GSEs are dead, the idea of government-guaranteed mortgage lending is going to be with us for a long time. Numerous participants from the private sector and academia voiced support for some sort of combined mega-GSE that would concentrate the government’s mortgage activities into one entity. The classic Washington game of reshuffling the bureaucracies has not worn out its usefulness as a solution for keeping useless agencies alive.

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