The Federal Government and the Mortgage Market

by Samuel R. Staley

In an editorial today, the New York Times calls on the Obama administration to take the lead in sorting out the “chaotic mortgage system” — that is, to head down the slippery slope toward a nationalized residential-housing market. Many feared the government was moving in this direction when it bailed out the major banks and seized Fannie Mae and Freddie Mac.

In truth, we need the opposite to happen. Private banks and other lending institutions need to take the hard hits for their poor lending practices, and the legal consequences for their sloppy paperwork, and sort this out themselves. The housing bubble (which was in substantial part a product of poor federal policymaking that encouraged risky mortgage-lending practices) created a huge disconnect between supply and demand. Only the private sector can bring this back into alignment, because it’s the private sector that best understands the specific needs of both lenders and borrowers. One-size-fits-all policy prescriptions, such as a nationwide moratorium on foreclosures or a requirement that mortgages in default be renegotiated, will simply create even more uncertainty and lock up the financing that’s critical for getting the housing sector back on its feet.