This was meant to be a sort of “week in review”, but I’m (predictably) late, so it’s more like an assortment of articles about housing policy.
On May 13 the Wall Street Journal reported that mortgage behemoths Fannie Mae and Freddie Mac are being encouraged to make more credit available, according to overseer Mel Watt, who communicated the current administration’s stark policy reversal with his statement. Until now, post-crisis housing policy had focused on restricting credit to prevent another boom and bust. Efforts to do so included proposals from Washington such as requiring larger down payments on mortgages, which critics argued would unfairly punish creditworthy borrowers. Read the article for more details on the so-called Johnson-Carpo bill. An interesting point is that the bill would repeal “Affordable-Housing Goals”, which require Fannie Mae and Freddie Mac to cater to purportedly “underserved” markets (i.e. inner cities and rural areas). One really interesting proposal (not a part of the Johnson-Carpo bill, just an idea) is that borrowers and lenders share more risk, allowing lenders to cash in if home values rose and take a hit if they fell (via a subsequent fall in the principal mortgage balance). It’s radical, which the article admits, but an interesting idea nonetheless.
Why is the housing market so important? The following article explains why the housing crash raped the entire economy, whereas the dot com crash, though slightly larger in terms of dollars of wealth destroyed, had a much smaller effect – and therefore also explains why so many people care so much about the housing market. The answer has to do with the distribution of losses, according to authors Amir Sufi and Atif Mian at FiveThirtyEight. On the same website, Andrew Flowers discusses the potential that a bond bubble is forming and how hard the economy would get screwed if this were in fact the case. The articles aren’t explicitly related, but it’s easy to apply the rationale set forth in the first article, about the distribution of losses and macroeconomic consequences, to what Flowers says about a potential bond bubble.