A big national policy initiative to kickstart subprime mortgage lending sounds so insane that I completely understand why former Treasury Secretary and NEC chair Larry Summers proposed it in a very elliptical manner in his latest column. It was item three on his four-point plan to get off the monomania over budget politics and start talking about jobs and growth instead:
Third, no American, regardless of his or her ideology, should be satisfied with the way the nation’s housing finance system is working. After a period when cheap mortgages were too available, the pendulum has swung too far; a lack of finance is holding the economy back. The clearest evidence is the growing number of lower- and middle-income families paying rents to the private-equity firms that own their homes at rates far above what a mortgage would cost.
Fannie Mae and Freddie Mac, the government-sponsored housing enterprises, have historically provided support to the mortgage market in difficult times. It is high time they be forced to step up and support would-be lenders. Ultimately, government support for owner-occupied housing should be curtailed, but now is not the time.
Let’s spell this out a bit. Normally you don’t want to rent a home when the monthly payment on a mortgage would be lower than your rent. Different things happen in people’s lives, so it’s not unheard of, but on average it should be a marginal phenomenon. And yet right now, enough people are doing this that it’s actually worth investment funds’ time to deliberately scoop up single-family homes and turn them into rental properties, even though that kind of business model has no real track record. But what failure of logic could lead to this situation? The issue is that while money is very cheap these days for those who are considered creditworthy, for many others the price of money is nearly infinite since they can’t get a loan. Fortunately, in Fannie Mae and Freddie Mac we now have two government-owned agencies capable of stepping in and turning non-creditworthy people into creditworthy ones by relaxing lending standards. Not all the way back down to boom-era levels, but a bit more flexible than they are today.
In terms of giving the economy a short-term kick, I think the logic is flawless (here’s Brad DeLong for more). But for one thing, I think the politics of this idea are so toxic as to make it barely worth discussing. For another thing, I think a lot of misguided concerns people have about fiscal stimulus are actually applicable in this case. Are you really going to withdraw this punchbowl when the economy is healthier? Aren’t you going to create an endemically unstable financial system? It would make much more sense to stimulate the construction sector with direct government building programs (on infrastructure, yes, but this could also be repairing office buildings or installing AC in schools) while trying to use monetary policy and regulatory reform to stimulate multifamily construction and manufactured houses.