Against Home Borrowership

Dean Baker writes,

If homebuyers knew that they had to put down 20 percent to get a lower cost mortgage, then they would be more likely to have a 20 percent down payment than in a context where this was not a requirement

Pointer from Mark Thoma.

I wish Baker had been there to help me at the hearing yesterday. The Congresspeople were chanting at least three scary mantras.

1. We need more home ownership.

2. We need to make sure that people who can’t make a big down payment can purchase homes.

3. We need to preserve the thirty-year fixed-rate mortgage that is pre-payable at any time.

I could not address any of these.* Instead, I tried to focus on debunking the idea that government needs to revive the mortgage securities market in order to “provide sufficient private capital” for mortgages. The other witnesses, and pretty much every Congressperson, were against me.

I am afraid that the housing lobby is alive and well, and very few economists share Dean Baker’s willingness to take it on.

*I tried a little bit, and more in my written testimony, to address (3), and in particular to explain that the interest-rate risk on the thirty-year mortgage is likely to be borne by taxpayers. Any institution that takes on a large portfolio of thirty-year mortgages has to, in addition to issuing long-term debt, purchase derivatives to hedge the prepayment option. Who will be on the other side of such transactions, writing these out-of-the-money options? My concern is that buried in the housing finance system somewhere will be the equivalent of AIG financial products. That is, an institution with way too much risk in its book, which regulators will discover only when it is too late.

8 thoughts on “Against Home Borrowership

  1. The problem here is that most any “truthful description” of the reality is “the wrong answer” – meaning it’s not the answer that makes voters happy, keeps people in power, etc. So as voters can be “rationally ignorant” so can politicians – in particular “kick the can” is in very real ways very strongly selected for.

    There are other political and “social” merits to home ownership – keeps people busy earning the mortgage payment, keeps city popluations more stable, etc. Whether the accounting (money) all blows up later is of limited import, at least until later comes…

  2. The goal is not to do what is rational, nor to protect taxpayers. The goal is simply to keep the current system alive at all (future) costs. The system as structured today simply cannot handle asset depreciation.

  3. Willful ignorance. Deliberate self-deception. Refusal to acknowledge the basis for the 2008 financial crisis: the series of inter-related actions by government, by investment banks, by mortgage brokers and borrowers and lenders, by GSEs, and by FED interest-rate policy makers.
    It is appalling that they are repeating a history created recently enough that we are still feeling its effects. They don’t even have the excuse of the passage of time. What is wrong with these people?

  4. Which Congresspeople?

    Why not invite them to your blog for a guest written discussion about their views?

  5. AK, do you think that whether or not there is an efficient liquid market in housing and housing debt is irrelevant to the value of houses to the economic players?

    Not that I said “value” rather than “price”. Second question, if one assumes that liquid markets incrase value, is whether this value is already in the price and whether higher asset valuation increases economic growth over time.

    If we generalize this as an enthropy vs structure choice, along what axis should this choice be evaluated?

  6. How did it come to be that some states have non-recourse mortgages?

    Especially when the rest of the world appears not to? What’s the history behind this?

    Is there a thorough history of mortgages (or debt in general), more like Homer and Sylla than Graeber?

  7. Do you think it would be more persuasive to pitch your argument by drawing a parallel with a fictional “equity ownership society”, where we encourage people to borrow a lot of money to buy equities, where we “need” to get more people to buy equities, where we encourage and subsidize buying equity options, etc.

    Clearly equities (and equity options even more so) are not suited for everyone. And the same is true for homes.

    But maybe the satire would be too difficult for politicians to get…

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