The State as Mortgage Lender

From the International Herald Tribune:

In a country that holds itself up as a citadel of free enterprise, Washington has morphed from being the lender of last resort into effectively the only resort for home loans for millions of Americans engaged in the largest transactions of their lives.

Before, the government's more modest mission was to make more loans available at lower rates. Now it is to make sure the loans that matter most to middle class Americans are made at all.

The new reality is scorned by libertarians and conservatives, who fear intrusions by the state in the market, and by populists and progressives, who rue a society in which education and housing increasingly rest upon the government's willingness to finance it.

"If you're a socialist, you should be happy," said Michael Lind, a fellow at the New America Foundation, a research institute in Washington. "But you should really wonder whether you want people's ability to pay for housing and college dependent on the motives of people in Washington."

Why is this happening? Much of the private money that once surged into the mortgage industry has fled in a panicked horde, leaving most of the responsibility for financing American homes to the government-sponsored Fannie and Freddie.

Two years ago, when commercial banks were still jostling for fatter slices of the housing market, the share of outstanding mortgages Fannie Mae and Freddie Mac owned and guaranteed dipped below 40 percent, according to an analysis of Federal Reserve data by Moody's Economy.com. By the first three months of this year, Fannie and Freddie were buying more than two-thirds of all new residential mortgages.

Of course, Fannie Mae and Freddie Mac are technically private businesses now, but they are businesses that politicians are inclined to bail out. This implicit backing of the government acts as a subsidy for homeowners.