Public Choice Links
The WSJ on housing; rent-seeking and the sale of Freddie and Fannie; Patrick M. Brenner on the thirty-year mortgage
The WSJ editorial board writes,
State and local governments have suppressed construction over many years while the feds and Fannie and Freddie have goosed demand. This has resulted in a housing shortage and pushed up prices. Historic low mortgage rates during the pandemic drove up prices even more. Home prices have climbed 55% since January 2020.
I believe that I deserve to be cited whenever the combination of “subsidize demand, restrict supply” is used to characterize government policy.
Earlier, the WSJ reported,
Goldman Sachs Chief David Solomon was at the White House this summer pitching President Trump on why his bank should lead a huge coming deal: the initial public offering of mortgage giants Fannie Mae and Freddie Mac.
…The CEOs of the country’s six largest banks—Goldman Sachs, Citigroup, Bank of America, JPMorgan Chase, Morgan Stanley and Wells Fargo—have all made pilgrimages to the White House. They have courted Trump and others involved, including Treasury Secretary Scott Bessent, Federal Housing Finance Agency Chief Bill Pulte and Commerce Secretary Howard Lutnick.
This is textbook rent-seeking. The public offering of these firms will yield large underwriting fees. The banks are willing to spend a lot of time and money to try to get a share of those fees.
It’s an insidious financial instrument so predatory and deceptive that it has warped the housing market for nearly a century. Ladies and gentlemen, I present the 30-year mortgage.
The mortgage is less a product of market choice and more one of central planning. Created by Depression-era reforms, subsidized through the Federal Housing Administration, the Department of Veterans Affairs, Fannie Mae and Freddie Mac, the modern mortgage represents Washington’s promise of a home for every American.
Brenner’s case against the 30-year mortgage is not the one that I would make. He argues that it encourages home buyers to take on more debt than what he thinks is appropriate.
I think that for borrowers, the 30-year fixed-rate mortgage is actually a good deal. If your interest rate is 6 percent and market rates go up to 10 percent, you hold onto your loan while watching lenders eat losses. That is what happened as inflation and interest rates rose in the late 1970s, destroying the Savings and Loan industry. If your interest rate is 6 percent and market rates go down to 3 percent, you refinance at the lower rate. Once you have such a loan, it’s “heads I win, tails you lose” for the borrower.
The thirty-year mortgage owes its existence to government subsidies. It was offered by the now-defunct Savings and Loan industry, when the firms were favored by deposit insurance, regulations of deposit rates, and restrictions on other avenues for savers. After the collapse of the S&Ls, the baton was passed to Fannie Mae and Freddie Mac, with their strong government backing.
In a free market, lenders would charge a large up-front fee to the borrower for a 30-year mortgage, or they would not offer such a loan at all. The thirty-year fixed-rate loan would disappear. Loans with rates fixed for 5, 10, or 15 years would dominate instead.
I have suggested that Freddie Mac and Fannie Mae be restricted to only buying 30-year fixed-rate loans, and then only for the sole purpose of purchasing owner-occupied housing. No refis, no financing of second homes, no investment properties. Let all other lending take place in the private market. If we want to preserve the 30-year fixed-rate mortgage, then let’s not privatize the profits and socialize the risks. We should keep Freddie and Fannie in the government, rather than turn them loose to try to profit at taxpayers’ expense.
"We should keep Freddie and Fannie in the government, rather than turn them loose to try to profit at taxpayers’ expense."
One theoretical advantage of selling them off is to make them as market-focused as possible and remove them slightly from political commandeering, control, and manipulation, that is, various partisan abuses.
An analogy could be to selling off federal land. In government hands, an administration can simply refuse to issue permits, or allow any kind of activity whatsoever, or improperly leverage the negotiating power of the property owner to condition such approvals to juice for bribes - on companies agreeing to support unrelated political or venal personal interests. In private hands the normal rules apply.
That normal 'private' activity is of course still heavily regulated and corruption-prone, but at least there is some incentive to avoid huge losses and produce actual value with the resources in order to make the money needed to pay the bribes. On the other hand, it opens up the possibility of government laundering impermissible state action through """private""" entities by secretly leaning on them to do under cover of private liberty what the state is not at liberty to do.
Yes, it's true that Fannie and Freddie in particular are always going to be inherently too government-adjacent to even remotely be genuinely independent operations in private hands. Everybody knows they would be bailed out in a pinch, and nationalized in a bad pinch. And they will be rent-seeking and bribing as much as they can get away with. Still, they might actually push back a tiny bit when asked (again) to distort their decision-making to serve political ends that will predictably throw hundreds of billions of dollars into a fire.
« I believe that I deserve to be cited whenever the combination of “subsidize demand, restrict supply” is used to characterize government policy. » Even when the person using this phrase is endorsing the policy?! 🙂