Mortgage Policy Conflict at the Wall Street Journal

You know the subprime meltdown is a tricky problem when the famously lockstep WSJ Editorial page offers two diametrically opposed views on it in the space of a day. First, Angelo Mozilo offers the following special pleading for Fannie and Freddie to up their mortgage guarantees:

The federal government now imposes a cap on the size of mortgages that government-sponsored enterprises (GSEs) and the Federal Housing Administration (FHA) can hold or insure. This cap is simply too low to meet the needs of buyers in many communities across the country. To mitigate this problem, Congress needs to temporarily raise the limits it now imposes on Fannie Mae, Freddie Mac and FHA mortgages by 50%, to $625,000.

On the opposite page, Martin Feldstein is skeptical:

Fed Chairman Ben Bernanke [has] called for a dramatic temporary rise in the maximum size of eligible Fannie Mae and Freddie Mac mortgages — to $1 million from the current $417,000. . . . [But] why should American taxpayers provide an implicit guarantee to mortgages of up to $1 million when the average sale price of a home is now less than $250,000?

Indeed. Finance can serve not merely as a route to the American dream, but also as a weapon in auction-like bidding that enriches nobody but the middlemen.


Feldstein inflicted a propaganda-laden Ec 10 course on me while I was an impressionable college freshman, so perhaps that’s why I see merit in some of his other recommendations. For example, he cautions against an “across-the-board limit on . . . mortgage interest increases” recently recommended by the head of the FDIC:

With more than $350 billion of mortgages scheduled to adjust up in 2008, such an imposed limit could no doubt avoid many personal defaults. But arbitrarily changing the terms of mortgages now held by investors around the world would also destroy the credibility of American private debt.

I don’t necessarily agree with his reason, but I sense the result may be right. I’d just like to see some more recognition of the human cost of the housing bubble so many well-paid bankers kept stoking over the past decade. I’ve seen “subprime” from both sides, and the pscyhological factors here can’t be overlooked.

First, my parents were trapped a subprime loan when we lived in Oklahoma in the 1980s. They were financially ruined by it when my father lost his job as a machinist, and spent years rebuilding their credit. The lender had no intention of adjusting the rate and took the house. That was a pretty terrible time for all of us, and I sympathize with the hundreds of thousands of other Americans who are probably going to face the same fate soon.

But I’ve also been disgusted by the recent bidding frenzy in DC and New Jersey when I’ve had to purchase a place to live in each area. In each case I bought an unappealing property in a poor location while watching the less risk-averse snap up better places with financial “innovations” like 108% loans (yes, no down payment plus 8% above the price to finance renovations). It seems deeply unfair for government to subsidize casino-style house purchases to help the reckless maintain their comparative advantage over the frugal.

Of course, many of the people taking out those loans weren’t just hedonists aiming for another rec room–they were concerned parents terrified of losing a bidding war for places in good school districts. So I suppose in the end I am ambivalent about Feldstein’s hard line. In America, so much of one’s quality of life is contingent on where one lives. Perhaps the only way to avoid the kind of bidding frenzies and desperation that drove the last housing bubble is to assure that the immense chasms between the health, education, and social opportunities now prevailing among different neighborhoods are bridged by some egalitarian social policies.

But I won’t be surprised if the very people who did the most to create the crisis end up the key beneficiaries of the reforms it provokes. Here’s a tough assessment of the Treasury Secretary from one commentator:

Even as hundreds of thousands of people saw their homes dispossessed (some of them were probably speculators who may have simply walked away from no-money-down mortgages), the problem was essentially invisible to Hank Paulson. Of course, it’s doubtful Paulson knows many subprime borrowers or subprime lenders.

On the other hand, the former head of Goldman Sachs is a member in good standing of the club of Wall Street CEOs. When the subprime meltdown began to disturb the CEOs’ sleep, he responded with alacrity. [And he] was careful to single out one class of actors for protection. He noted that the issue has been raised as to “whether greater liability should be imposed on securitizers and investors.” In other words, should the Wall Street firms that peddled mortgage-backed securities that turned out to be worthless a few months later be subject to greater accountability through the legal system? His answer: “In my view, this is not the answer to the problem.”

I suppose we want to insure they can bring us more financial “innovations.” And why were Wall Street Firms so eager to sell risky mortgage-related securities? As related in the NYT ““There is a maxim that comes to mind: ‘If you work in the kitchen, you don’t eat the food,’” said Josh Rosner, a managing director of Graham Fisher, an independent consulting firm in New York.”

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