First, banks have partially withdrawn from the mortgage game after facing swathes of new rules and $110 billion of fines for misconduct. They still own mortgage-backed bonds and they still make home loans to wealthy folk, which they keep on their balance-sheets. But with the exception of Wells Fargo they are less keen on writing riskier loans in their branches and feeding them to securitisers. New, independent firms like Quicken Loans and Freedom Mortgage have filled the gap. They originate roughly half of all new mortgages.
The second big change is that the government’s improvised rescue of the system in 2008-12 has left it with a much bigger role (see chart 3). It is the majority shareholder in Freddie Mac and Fannie Mae, mortgage companies that were previously privately run (though with an implicit guarantee). They are now in “conservatorship”, a type of notionally temporary nationalisation that shows few signs of ending. Other private securitisers have withdrawn or gone bust. This means that the securitisation of loans, most of which used to be in the private sector, is now almost entirely state-run. Along with Fannie and Freddie, the other main players are the Veterans Affairs department (VA), the Federal Housing Administration (FHA) and Ginnie Mae, which helps the FHA and VA package loans into bonds and sell them.
This is from “Comradely capitalism: How America accidentally nationalised its mortgage market,” The Economist, August 20, 2016. These two paragraphs come immediately after the subtitle “The Trouble with Gosplan.” The noun Gosplan should ring a bell: it was the central planner of the Soviet economy from 1921 to 1991.
The whole piece is excellent, I think. Why “I think?” Because although various friends of mine love The Economist, I don’t. The motto for that publication should be “Sometimes wrong; never in doubt.” There’s a tone of certainty in so much of its articles that is unjustified. I think that’s one of the pitfalls of unsigned articles.
READER COMMENTS
Don Boudreaux
Aug 30 2016 at 11:03am
David:
Thanks for clarifying for me what it is that I dislike about The Economist. For years something about that publication really irked me – and still does. But I never identified the reason for its irksomeness. You’ve put your finger on it.
David R. Henderson
Aug 30 2016 at 2:10pm
@Don Boudreaux,
You’re welcome.
David Friedman
Aug 31 2016 at 4:04pm
When Mao died, the Economist article credited him with ending famine in China. Considering that he was responsible for one of the largest famines that ever occurred anywhere, with estimates running around thirty million dead, that was a non-trivial error. I don’t know if they ever apologized or explained.
David R. Henderson
Sep 1 2016 at 10:26am
@David Friedman,
Wow! Thanks.
benjamin weenen
Sep 1 2016 at 2:06pm
Of course mortgage lending should only be allowed though a State bank.
Land rents, like those derived from mortgage interest, should be used as public revenue in lieu of taxes on wealth creation.
To allow banks a perpetual access to unearned income makes no sense. It harms efficiency and equality.
Of course a straight up LVT would be the best solution, but a National mortgage bank is infinitely better than our present arrangements.
Would it not be better banks mainly lent on productive assets? Maybe their reputation would be better for a start.
Emerich
Sep 2 2016 at 7:54pm
Agree with the comments above about the Economist and would just add that in general, they are editorially far less friendly to markets than they once were. In 2008 they endorsed Barack Obama, and haven’t apologized for that either.
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