Housing Finance Reform
By Arnold Kling
The systemic failure of 2008 reflects the accumulated distortions of the political response to past failures with political causes. Portfolio lending savings and loan associations, the traditional backbone of the US housing finance system, were forced to subsidize interest rate risk. Federally chartered S&Ls in particular were required to finance fixed rate mortgages- historically with both “assumption” and “prepayment” clauses-with short term deposits. They were granted significant tax and regulatory advantages relative to banks, but by the 1970s they were at a major disadvantage to GSEs that paid little or no tax and were required to have only negligible capital. This system collapsed in the 1980s …
It is a long piece, difficult to capture in an excerpt.
I think it is important to understand that we have a long history of trying to manage housing finance, and an equally long history of having our efforts blow up.