Amid all the clamor about entitlement reform during the struggle to raise the debt ceiling, one enormous cost - and potential source of future saving - largely escaped scrutiny: the billions of dollars the United States spends to support the mortgage market. Even before the 2008 financial crisis, the government assumed the credit risk on most loans, which allowed banks to offer better rates but ultimately left taxpayers footing the bill when the housing market collapsed: $138 billion and counting.
That could finally be about to change. After next month, federal loan limits in expensive areas such as Boston, New York City, and Los Angeles are set to decline from $729,750 to $625,500. Had the lower limits applied last year, the government would have backed 50,000 fewer loans. But even this modest pullback may not happen. At the urging of homebuilders and Realtors, lawmakers in both parties want to extend the higher limits, possibly for good. It's an early skirmish in the larger battle over the government's proper role in the mortgage market. And the issue isn't just when to pull back, but whether to do so at all: Many Americans have come to regard cheap mortgages as an entitlement.
In theory, the U.S. could go the way of most European countries and stop guaranteeing mortgages altogether, thereby protecting taxpayers from budget-busting losses like the ones just incurred here. (Subsidies to advance homeownership among the poor could be delivered directly.) This would force banks to absorb the interest-rate and credit risk from their loans, but the added risk would be passed along to borrowers in the form of higher rates, and could even put an end to the traditional 30-year fixed-rate mortgage -- the foundation of the U.S. housing market, although it is rare in other countries.
Instead, the recent credit downgrade and new fears about the weakening economy make it likely that Congress will once again extend the emergency interventions in the mortgage market. The White House officially opposes doing this, although it will probably relent.
This plan would satisfy neither side completely, and would especially upset the purist Republicans now in ascendancy, for whom any role for government is grounds for opposition. But most politicians, even if they don't say so, understand this basic fact: For all that voters like to complain about government, most would be angry if forced to give up the benefits it affords them.
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