One gets the strong impression from Peter Coy’s comprehensive piece on reforming the mortgage market that he likes his market thoroughly regulated. Regardless, Coy talks to a wide range of experts and he raises a number of important points about the political barriers to transitioning away from our increasingly state-dominated mortgage market:
Even if you favor extreme action, changing the system doesn’t need to be as abrupt as flipping a switch. It can be like adjusting stereo knobs, says Phillip L. Swagel, an economist at the University of Maryland School of Public Policy who served as an assistant secretary to Treasury Secretary Henry D. Paulson during the George W. Bush Administration.
Swagel’s knob-twisting metaphor makes the tradeoffs clear. One knob raises the fee that Fannie Mae and Freddie Mac charge to guarantee loans. The higher it gets, the more room there is for the private sector to enter the market and the smaller a role Fannie and Freddie will play. (Though the FHA presumably would pick up some of the slack as well.) A second knob controls how much private capital must be put at risk. The thicker the private capital buffer, the lower the risk to taxpayers. And a third knob regulates how safe loans need to be before the government will guarantee them. In each case, twisting the knob reduces the government’s role in housing but makes mortgages less affordable and harder to get. The hope is that each action leads to harmonic convergence.
Even the man in the White House thinks the knobs need to be twisted somewhat, although not while the housing market is under intensive care.
Coy maintains that the basic structure of the post-New Deal mortgage market is “reasonably sound,” a view that I don’t share. Yet Swagel offers a sensible way forward: make the costs of government guarantees more transparent to ease the transition to a much-reduced federal role in the housing sector.