Subsidized Lending

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Harold Pollack has gotten religion on federal housing policy:

Here is one central reality. A small down payment mortgage is the most leveraged, least diversified investment most Americans will ever make. If we internalize the idea that housing prices do not automatically traverse an upward escalator, it’s not obvious that we should be encouraging families to take these risks. The risks are greatest when families assume subprime mortgages or are victims of fraud. But even when everything is transparent, there are inherent risks.

It’s easy to overlook these risks because housing prices were on a positive trajectory for many years. Low-interest, low-money-down VA and FHA loans promoted upward mobility for a quarter-century following World War II. One might regard these policies as central pillars in the creation of a stable middle-class. Maybe they were. Yet in retrospect, the more important factor was the anomalous stable and prosperous stretch of American economic history that supported these policies. There is no guarantee that such sustained and stable prosperity will return anytime soon to Americans of modest means.

It’s always worth thinking about other ideas. Suppose I proposed that the government create a program to subsidize middle class families making modest 5:1 leveraged investments in the stock portfolio. Put $20,000 down, get yourself $120,000 worth of stocks, pay interest on the loan but less than the market rate thanks to an implicit federal guarantee. That would be a way of encouraging middle class savings and investment, a perhaps worthy goal. But it’d be a pretty strange way of going about it. What’s more, if we announced the program tomorrow stock prices would presumably go up which would mean that in the future people are getting a subsidy to buy assets that are more expensive than they would have been had the subsidy not been put in place.