Saturday, August 10, 2013

Obama Talks Up New Mortgage Plan. Is It the Answer

Can the US Have High Rates of Home Ownership without Creating Booms and Busts?



 Aug 10, 2013 - Los Angeles - During this past week President Obama has been criss crossing the US and using his Saturday morning radio address to promote reforms in the housing and mortgage industries.  He laid out several goals:
  • Wind down Freddy and Fannie
  • Create a new mortgage insurance market in the private sector
  • Congress to make sure that citizens have access to affordable mortgages
  • We need to find a way to make sure renters have access to affordable housing
These may all be laudable goals, but are they any different than the goals set out by President's Clinton and Bush?  Both were pushing for record percentages of Americans to grab their piece of the American dream that includes owning their own home.  Have we totally failed to learn the lesson that when government inserts itself into the market, the market will be changed, and generally for the worse?

Winding down Freddie and Fanny may be a fine idea.  These quasi governmental agencies are one of several governmental sectors that contributed to the 2007 bust.  There is also good reason to believe that the private mortgage insurance industry will be only too happy to take up the slack.  But there is a minor problem.  There is a real cost of this insurance.  And it must be born by the buyer.  The higher the risk, the higher the cost of the insurance.

So we get caught at cross purposes.  If we want more home ownership,  each successive percent of those who need a mortgage will be a riskier group.  These riskier groups will ultimately hit a soft patch in the economy, or a correction in the housing market, and their will be defaults.  With the defaults, there is an unwinding.  The unwinding effects the insurance companies, the mortgage companies, and the riskiest groups of consumers.

If the President or Congress has some way to provide home ownership for a larger percent of the population without that incremental portion being at greater risk of default, then neither has shown us how that works.  If the President or Congress has a method for eliminating boom bust cycles in a capitalist system, they have not shown it.

One thing for sure, the President can be credited with speaking truth on the subject of bailouts.  He was clear in his statement on Saturday morning that we no longer want to provide a system that allows for reckless behavior by businesses or governmental agencies, and then when they crash and burn, have the folks bail them out. 

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