More Government Won't Fix The Mortgage Mess

Tim Geithner's recent comments should make it clear that the Obama administration has no new solutions for clearing the mess in the mortgage market.

Opening a conference on the future of housing finance, Treasury Secretary Timothy Geithner announced his support for rainbows, the American flag, and a “carefully designed guarantee in a reformed system, with the objective of providing a measure of stability in access to mortgages.”   Okay.  He wasn’t explicit about the rainbows or Old Glory, but a speech about either of those two topics would have said just as much about the administration’s real intentions for housing finance than the remarks Geithner delivered.

Nearly everything Geithner said is pretty obvious. Quite simply, there’s no reasonable scenario that involves the government taking a totally hands-off attitude towards the mortgage business. The 30 year self-amortizing mortgage that most American home-buyers want probably wouldn’t have existed in the first place without government intervention. The tax code, as currently structured, makes it economically irrational for most middle class people not to own a home. Even if the government ended all explicit intervention with the mortgage market (abolishing Fannie, Freddie, and the Federal Housing Administration), its continuing role in guaranteeing depository institutions, insurers, small business administration loans, VA loans, FEMA loans, and more would keep the governments’ hands all over the mortgage business.

Direct and indirect subsidies for mortgages are almost certainly the most widely provided government benefit. Somewhere upwards of 80 percent Americans will become homeowners at some point and, even with the housing crisis, over 65 percent own homes today. Since the United States has one of the highest homeownership rates in the world—the only countries with higher rates are places that people often inherit homes (Spain) or that concentrate a very large portion of their population in a single metropolitan area (Israel and England)—a theoretical total public sector withdrawal from the mortgage market would likely raise even more angry mobs than would major reforms to Social Security.

Thus, Geithner’s “newsmaking” comments affirming a public role in the mortgage market shouldn’t  bother anyone besides the most wild eyed libertarian. In fact, what he didn’t say is a lot more important than anything he said. If the Obama administration wants to make a real difference—and fix the problems stemming from the bipartisan “homeownership Über Alles” strategy of the Clinton and George W. Bush administration—it needs to offer a lot more than the weak gruel Geithner  and company have served up so far.