Mortgage rules put recovery at risk

A plan to jump-start housing

Policy proposals for dealing with our current depressed economy are largely at an impasse. Monetary policy has gone about as far as it can go, while fiscal policy is hamstrung by political constraints on any measures that enlarge the federal debt. Housing policy, in contrast, has enormous expansionary potential that can be released merely by revising or eliminating some of the many unproductive rules governing how home loans are granted.

These rules originate from Fannie Mae, Freddie Mac and in some cases from the Federal Housing Administration (FHA). In combination, these agencies touch about 95 percent of all home loans being written today. Most of the rules apply to who is and who isn’t qualified to borrow, and among those qualified, to how much extra they have to pay for deviations from pristine status. The liberalized rule changes would reduce expected losses to the agencies because the additional housing demand that resulted from them would stabilize home prices.