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We've Nationalized the Home Mortgage Market. Now What?

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The home loan market was nationalized in a slapdash fashion and is now riven by conflicts of interest and competing goals. To solve it, a consensus is forming to head down the path of the least resistance but greatest risk.

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Swagel argues, contra more hard-right Republicans, that a fully private housing finance market is an illusion. Housing is so important for the economy that the government will inevitably bail it out in a serious crisis. Therefore, even if the government was somehow removed from the market explicitly, the backing would be there implicitly. Conservatives have an interest in pushing for the government to charge the right price for its insurance and to minimize its role.

Such views suggest there is a compromise available for the reaching. "This is one of these areas where a consensus should happen," Swagel says.

But some people, especially outside the Beltway and Wall Street, think twice about reverting to a large private-market role, given that profit-seeking led to the subprime debacle. While hardly anyone is pushing it, there is an Option 4: Expanding the government's role in the mortgage market, perhaps by having the government back home loans more directly. It could be done by a government corporation, akin to the Federal Deposit Insurance Corporation, which has a measure of independence from congressional or executive branch interference, but wouldn't seek profit. In that way it would avoid the conflicts inherent in the Fannie and Freddie public/private hybrid model.

"Profit-seeking is what gets banks and financial institutions into trouble. The government can get into trouble too, but it seems it gets into less trouble," says Susan Woodward, the former chief economist of the U.S. Department of Housing and Urban Development under Presidents Reagan and George H.W. Bush. Moreover, "It's very hard for government to do something that hurts consumers."

David Scharfstein, a professor at Harvard who served in the Obama Treasury, worked on the white paper pushing Option 2, limited guarantees for mortgages only when a crisis strikes. He worries about Option 3, which he calls a "re-do of Fannie and Freddie."

But the forces backing it are powerful. "It's striking 2014 and very unusual 2014 for the housing industry, Wall Street, and consumer groups to all be advocating essentially the same policy," he says.

That doesn't happen much and when it does, he says, look out. His fear is that private for-profit entities would want to grow and expand their market share. They would lobby to reduce the amount of capital they have to reserve for an emergency, and to lower the fees charged for mortgage insurance so they could compete on price. If another crisis hits, lower capital reserves and lower fees would make them far more vulnerable to going bankrupt, leaving the taxpayer to bail them out. "It should be a private market or the government. But the government backstopping private entities," Scharfstein says, "is the worst possible combination."

Editor's Note: This article by Jesse Eisinger was originally published on ProPublica.org.
No positions in stocks mentioned.
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