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Home Loans From Washington? A Simple Alternative

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Written by Dean Baker   
Wednesday, 17 October 2012 11:45

In the good old days, we just had Fannie Mae, there was no Freddie Mac, nor were there mortgage-backed securities. Fannie Mae was a public company, no shareholders, just the government. And there were none of the privately issued mortgage-backed securities that blew up so spectacularly when the housing bubble collapsed.

During this period we saw an unprecedented surge in middle-class and working-class homeownership. It was during the decades after World War II that a majority of the country became homeowners. Then in the late 60s we moved away from this simple system. We privatized Fannie Mae and created its sibling Freddie Mac as a quasi-public corporation. Both provided dividends and capital gains for shareholders and Wall Street pay for top executives, while giving the risk to taxpayers. During the 40-plus years that we opened up the system to the private sector, we have made almost no progress in expanding homeownership.

It is reasonable to ask why we don’t just go back to the old system. After all, the system of home finance was supposed to make homeownership simple and cheap. The old Fannie model did just that. Given that Fannie Mae and Freddie Mac are now both effectively owned by the government, it would seem the simplest route is to just leave them owned by the government.

Many economists and policy analysts have been employed at six-figure salaries designing convoluted new public-private hybrids. And there will undoubtedly be many seven-figure jobs running these hybrids corporations if these plans are put in place. However, there is zero reason to believe that these convoluted schemes will better serve homebuyers than a simple government-run mortgage system.

The people who want to buy mortgages that resemble complicated lottery games will still have the option to go to Wall Street for whatever crazy products its wizards can dream up. But the vast majority of people who see a mortgage as a way to finance a home purchase will have a low cost alternative. What’s wrong with that?

This post originally appeared on the New York Times' Room for Debate.

Comments (4)Add Comment
Homeowners
written by Edward Woltz, October 19, 2012 1:38
We all know that today's generation has got great dreams and they strive hard to fulfill those dreams. One of such is having your own home. That is why may be the demand has increased.

agence immobilière angers
...
written by PeonInChief, October 20, 2012 8:10
Well, what's wrong with that is that it doesn't allow sufficient profit opportunities for the private sector.
Federal Reserve Retail
written by Kaleberg, October 20, 2012 9:58
The financial industry has an obsolete business model. It is based on hard to find credit information, the need to protect valuable objects and expensive computing. Right now, there are a number of variously reliable sellers of credit information, gold and cash are less commonly used and computing is extremely cheap. The Federal Reserve should simply open a retail window to provide credit for the vast majority of private citizens businesses, and leave the other financial garbage to financial industry. That way, when the financial industry blows itself up, as it does on a regular basis, the economy will not be affected.
Home equity percent plunges
written by Ben L, October 21, 2012 1:58
For 30 years wages were stagnant, relative especially to productivity, and in the past 10 years before the bubble's bust home prices peaked. So everyone refinanced at a fictitious higher home price. They owed more but paid less monthly, increased their monthly income, increased their debt level. I think collectively "homeowners" owned in 1970 about 70% of their home value, then in 1980 about 60%. In 2007-2008 they owned 38% of the value and the banks owned 62%, the first time banks owned the majority of value of U.S. home mortgages. I draw from Sylvia Allegretto's State of Working America's Wealth, March 2011. Really bad regulation, and interest policy from the Fed, and stagnant wages --- and then the problem with Fannie and Freddie -- created the problem. Now we see a period of systemic lowering wages, declining annual incomes, greater inequality, and no more wives to put into the workforce, into the distant future, not a good augur for home sales.

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