Obama Desires Big Role For Government In Mortgages

Until I read this article in yesterday’s Washington Post, I thought all sides were agreed that the federal government needed to reduce its role in the mortgage market.

Fannie Mae and Freddie Mac have so far cost taxpayers $166 billion in bailouts and may need hundreds of billions of more dollars. That’s one gigantic disaster! You’d think politicians would find that humbling. Just five years ago, Barney Frank was assuring us that Fannie and Freddie were worth taking a chance on. It was worth taking a chance on lowering standards for mortgage lending.

Now we see in this giant housing crash what are the dire results of reducing standards on mortgage lending.

Mortgage lenders did not reduce standards for lending because of a lack of government regulation. They reduced standards precisely because of government regulation. They had no choice. They couldn’t invest as a regular business. They had to have the blessing of politicians and bureaucrats to invest and this came at the price of a lot of risky lending to minorities who would not have otherwise qualified for a mortgage.

Obama appears poised to keep federal government in the business of insuring new mortgages. This will mean a big role for Fannie Mae and Freddie Mac, even if these institutions get new names.

This federal government intervention will keep alive the 30-year fixed rate mortgage. If left to the private market, this type of mortgage would largely disappear.

I’m dying to know if the Obama administration will introduce its proposal before the 2012 elections. These elections are sure to be bitter and are sure to revolve around the role of government in America. Do people want big government socialism or small government capitalism?

What would a dramatic reduction in the federal role in mortgages do to mortgage interest rates? Rates would undoubtedly rise as would fees and many of the more popular types of mortgages, such as the 30-year fixed rate mortgage, would disappear.

I’m encouraged to see that Obama’s economic advisers are split about the new proposals. Many of them recommend reducing the federal government’s role in the mortgage market, arguing that it puts taxpayers at massive risk while conveying little benefit to home owners.

The Washington Post reports:

President Obama has directed a small team of advisers to develop a proposal that would keep the government playing a major role in the nation’s mortgage market, extending a federal loan subsidy for most home buyers, according to people familiar with the matter.

The decision follows the advice of his senior economic and housing advisers, who favor maintaining the government’s role as an insurer of mortgages for most borrowers. The approach could even preserve Fannie Mae and Freddie Mac, the mortgage finance giants owned by the government, although under different names and with significant new constraints, said people knowledgeable about the discussions.

A decision to preserve a major government role would mark a big milestone in the effort to craft a new housing policy from the wreckage of the mortgage meltdown and could mean a larger part for Fannie and Freddie than administration officials had signaled.

About Luke Ford

Raised a Seventh-Day Adventist at Avondale College in Australia, Luke Ford moved to California in 1977. He graduated from Placer High School in 1984, reported the news at KAHI/KHYL radio for three years, attended Sierra College and UCLA, was largely bedridden by Chronic Fatigue Syndrome for six years, and converted to Judaism in 1993. From 1997-2007, Luke made his living from blogging. Living by Beverly Hills (Alexander90210.com), he now teaches the Alexander Technique (moving the way the body likes to move). Lessons cost $100 each and last about 45 minutes. In 2011, Luke completed a three-year teaching course at the Alexander Training Institute of Los Angeles. His personal Alexander Technique website is Alexander90210.com. Luke is the author of five books, including: » The Producers: Profiles in Frustration » Yesterday’s News Tomorrow: Inside American Jewish Journalism
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