Arnold Kling suggests a sensible way of recreating the government supported mortgage industry.
In my presentation to the panel, I will say that a government mortgage guarantee is like the ethanol mandate. Whatever the alleged public policy justification, it is really a special-interest handout. See Your Mortgage, Their Rent. Of course, just as with the ethanol mandate, it will be very hard to stop and, once in place, impossible to kill.
I am so pessimistic about the politics of housing finance reform that I think that the best hope would be to try to create a restrictive charter for the new government guarantee agency. Make it illegal for the agency to guarantee cash-out refinances, second mortgages, investor loans, home-equity loans, negative-amortization loans, and ARMs. Limit the agency to owner-occupied mortgages, for purchase or rate-lowering refis, with fixed rates for 15 or 30 years. Getting that would be a huge victory, and it would not detract from any legitimate public policy goals, but I doubt that it is achievable. Wall Street and the housing lobby are going to have their way with the public, and we’re going to end up having to bend over and submit.
He’s right that outside of 15 and 30 year loans, there is little on the menu of mortgage products which have much to do with supporting home ownership. No doubt that even with such limitations the political class would still mandate dubious credit extensions to favored constituencies but at least the fallout would occur in a more limited universe.