As many people know, the federal government is currently trying to decide how the mortgage giants Fannie Mae and Freddie Mac should function in the future, if they should even exist at all. As this Wall Street Journal article explains, the three options currently being discussed include keeping the firms as middle men that bundle together mortgages and sell them to investors, getting rid of the firms entirely and have mortgages originate solely from private institutions, or replacing/reorganizing the firms with an institution that would basically insure mortgage-backed securities in a way similar to how the FDIC insures bank deposits.
One of the main sticking points in this discussion is that the existence of Fannie and Freddie gives American homeowners access to the 30-year fixed-rate mortgage, something that is not available in most other countries. My question is, should access to a 30-year fixed-rate mortgage and a mortgage market essentially devoid of credit risk (when Fannie and Freddie cover for homeowners who default) be a public good? This kind of mortgage market definitely could be a public good, as it is both non-rival and non-exclusionary.
The main reason to offer non-exclusionary goods as public is because of the free-rider problem. One solution might be to only offer fixed-rate mortgages and lower rates to borrowers who have purchased some form of insurance in case of default. If this is infeasible, or could not be created in a private market, the existence of Fannie and Freddie just might have to continue as a public good.
1 comment:
Public goods are supplied at a price which is equal to the marginal cost of the good, and the vertical summation of individual benefits to each consumer, or the vertical summation of each consumers' demand curve. In theory the type of loan you describe seems like a perfect public goods, (unlike fannie and freddie's loans which did have loan caps thus excluding the good from people who purchased homes with prices $400,000 or more). The loans themselves seem like perfectly acceptable ideas, a voluntary exchange between the consumer, who wants a more flexible loan, and lenders/investors, as the mortgage backed securities offer lenders more security for their assets. For me, I don't think they should be pure public goods because the marginal social cost of such a program is unclear. If a market externality occurs such as everyone defaults on their loans, the marginal social costs of a MBS security program like that could be huge! The higher the marginal costs, the less of the public good can be supplied. Meaning the feasibility of such a program should be low. I believe the program should be excludable, in other words those with even marginally risky mortgages or without security should not be allowed to partake in the consumption of the good, so to better control marginal social costs.
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