Mark Zandi’s Wacky Mortgage Contraption

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Far more interesting than the details of Moody Analytics chief economist Mark Zandi’s proposal to rework the mortgage market are the meager gains he thinks it would obtain.

Zandi has a proposal to scrap Fannie Mae and Freddie Mac in favor of ten new companies that would guarantee mortgages with an explicit government guarantee.

He’s got all sorts of arguments about why this hybrid public-private system would be better than either a fully public or a fully private model. But look at what he thinks the system would achieve.

• An 8% gain in home prices.

• 375,000 more home sales per year.

• A 1% increase in home home ownership

• A 0.9% decrease in mortgage rates.

Why on earth would we want to create a complex, government-backed mortgage insurance system for that?

Let’s be clear. There is no social benefit at all to any policy that is aimed at increasing home prices. In fact, there’s only a social cost—a good most people want becomes more expensive. It doesn’t even really benefit homeowners, most of whom are looking to sell a home to buy a new one. The only real beneficiaries are mortgage lenders, who get to earn more interest on bigger loans.

A one-percent increase in home ownership and a one percent decrease in mortgage rates hardly seems worth the risk that Zandi’s plan would put on taxpayers. His 10 new mortgage insurers would supposedly be capitalized at a level to sustain a 25 percent drop in home prices.

That capitalization is likely to fall as the government backed mortgage insurers come under political pressure to back loans to politically favored segments of the population in exchange for looser regulation. But even at 25 percent, each and every one of those companies would be broke if they were backing mortgages through the housing bubble. From the peak, home prices have declined nationally by 26 percent—and in some areas they have declined by nearly 70 percent.

Almost every single plan to create a public-private mortgage hybrid system pretends as if government backing creates free wealth for the public. It doesn’t. Fannie and Freddie have now cost taxpayers far more money than they ever saved homebuyers in the form of lower interest rates. They were, however, effective means for mortgage lenders and Wall Street bankers to become fabulously wealthy.

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