The New York Times Has Never Heard of Jumbo Mortgages

That is what we should conclude from an article on the Obama administration’s proposal for dismantling Fannie Mae and Freddie Mac that told readers:

“Investors also may be reluctant to provide money for 30-year fixed-rate mortgages, a product that has never existed without government support.”

Jumbo mortgages are mortgages whose size exceeds the maximum allowed for them to be purchased by Fannie Mae or Freddie Mac. They have been offered by the private sector at interest rates that were usually about 25 basis point (0.25 percentage points) higher than the rates charged on mortgages that could be purchased Fannie and Freddie. Since the crisis this spread has increased to around 75 basis points.

The article also bizarrely frames the discussion in a context where “the country could no longer afford to sustain its commitment to minting homeowners.” It is absurd to say that in the past we could afford a commitment that we will not be able to afford in the future, since we are getting richer year by year. With productivity growing at a rate of about 2.5 per cent a year, the country will be generating almost 30 per cent more output for each hour of work in a decade, and over 60 per cent more than we produced back in 2000. If we could afford a commitment to “minting homeowners” in 2000, then surely the country could afford it in 2020.

The more obvious question is whether it is good policy. Many moderate-income people were persuaded to buy homes at the peak of the bubble, losing whatever savings they had accumulated and ending up seriously underwater in their mortgages. Also, many people in unstable work or family situations, who will not be able to stay in a home for a long period of time, have wasted large amounts of money on realty fees, closing costs, and other transactions costs as a result of buying a home. This is why people who care about giving moderate income and low income families good housing options and the opportunity to accumulate wealth do not push homeownership but focus on rental options instead.

Also, the government did not solve the moral hazard problem associated with the public/private mix in Fannie and Freddie. These institutions ended up bankrupting themselves because they were run by executives who received Wall Street type salaries in the tens of millions a year by virtue of generating large amounts of fees. This incentive structure encouraged them to take huge risks since they had a government guarantee standing behind them.

These policy issues loom as much larger concerns than whether the government can afford a commitment to homeownership, since it so obviously can.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.