The Mechanics of Changing American Mortgages
If it’s too difficult to change how all these different government agencies currently regulate mortgages, here are 2 alternatives.
Update the Fed’s Mandate To Be “Stable Prices, Including House Prices" and Give It the Authority Needed to Fulfill the Mandate
Houses are, after all, the largest household expenditure by far and the largest part of American household wealth. Update the Fed mandate, give them the authority they need overall mortgage lenders, and let the Fed figure out how to do it like they do with their other mandates.?
This refined mandate, however, would be a huge increase in Fed responsibilities and it would make their job harder so they’d probably belittle any such change.?
Housing-Prudential Policies. The Fed would likely have to create policies directed specifically at house price stability. Instead of macroprudential policies that affect the entire economy, these would be “housing-prudential” policies directed at the largest component of consumer prices and household wealth – house prices.?
Supervisory Authority. The Fed would need supervisory authority over all mortgage lenders.?
Market-Specific Policies. Sometimes, some areas see irrational exuberance in house prices while others don’t. That makes things a lot more tricky.?
If the Fed took national action (whether discretionary or using a policy rule) to dampen price increases in individual exuberant markets, it could hurt the other markets that aren’t exuberant. National policies that would help stabilize skyrocketing house prices in San Francisco could cause house prices to fall in Detroit.?
On the other hand, market-specific housing-prudential policies that are fine-tuned to the current situation in individual markets could open up a whole new can of worms for the Fed, including politically. House price stabilization policies could vary from market to market in this scenario.
All Purpose Policies. Hopefully, they would find and use policies that reduce wild price swings and help stabilize house prices when prices are going up fast or down fast, and don’t hurt other markets that aren’t having wild price swings.?
Depends on Fed Perfection. Another issue with discretionary changes versus automatic stabilizers, especially if the policies are discretionary market by market, is expecting the Fed to always make perfect decisions. The Fed, naturally, will sometimes make mistakes and sometimes those mistakes will make things worse.
Ideally, the Fed would find policies that stabilize all markets always and don’t depend on superhuman wisdom to be effective.
Use QE and QT to Stabilize House Prices. Currently, without changing its mandate, the Fed could decide to change its strategy and to make its QE policy “counter” cyclical for the housing industry by doing the exact opposite of what they do now.?
Right now, to manipulate the wealth effect, the Fed intentionally destabilizes house prices by focusing its QE (Quantitative Easing) on mortgage-backed securities (MBS) which lowers mortgage rates more than other interest rates, and that destabilizes the already incredibly interest rate sensitive housing industry more than other industries. See Secret #66.
The Fed could do the opposite and buy mortgage-backed securities when they RAISE the Fed rate which would make mortgage rates increase LESS than otherwise and that way rising interest rates would destabilize house prices a bit less. When the Fed eventually lowers the Fed rate they could sell their mortgage-backed securities which would also stabilize mortgage rates and house prices a bit.?
Of course, to be effective, these types of policies are dependent on the Fed making the right decisions at the right time which doesn’t always happen.
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It would be ideal, as mentioned above, if the Fed would only buy securities backed by safer, lower-foreclosure types of mortgages – such as 20-year mortgages – which would lower the cost of those more stable mortgages, which would increase their numbers, and increase the stability of house prices, families and the national economy.?
Or, Create a Central Housing Bank and Give It the Authority Needed to Fulfill Its Mandates
Instead of updating the Fed’s mandate, create a new "Central Housing Bank" like the Fed but with the goals of,
If current agencies and the Fed don’t want to work together to stabilize house prices, this new agency could be given the mandate and authority needed.
Politicians would have to design a new powerful regulatory structure with a lot of authority over mortgage design and mortgage lenders.?
The Central Housing Bank would also face some of the same problems mentioned above for the Fed. It would have to create and administer policies directed specifically at house price stability, “housing-prudential” policies, and if they have market stabilizers that can vary over time and by market, face those challenges.
Or, perhaps, the Central Housing Bank could supervise and regulate the creation of an all-in-one (covered bonds) mortgage banking industry.
Public Utility. Perhaps the Central Housing Bank could be set up more like a public utility regulator to regulate and standardize the private home mortgage securitization market.
An “FDIC” for Foreclosed Houses. Or perhaps the Central Housing Bank could be an FDIC for housing foreclosures. Instead of taking over banks going through foreclosure to stabilize the banking sector, the Central Housing Bank could buy houses going through foreclosure by their regulated mortgage banks when needed to stabilize home prices, not just for lenders, but more importantly, for home owners in general.?
They could buy foreclosures when house prices are falling fast in an area to prevent prices from falling even more, and then sell those previously foreclosed houses at a discount to non-profit, limited-profit, cooperative, and public social housing agencies to rent out.?
Or perhaps, to simply stabilize house prices, the Central Housing Bank would buy foreclosures when house prices are falling, rent them out for years, and then sell them when (nominal) house prices return to their previous levels. That would stabilize house prices on both the downside and the upside. See related ideas here.
Dependent on Perfection. Another issue is the effectiveness of such a change would depend on the Central Housing Bank leadership making the right decisions at the right times but, naturally, like the Fed, they would sometimes make mistakes that make things worse.?
A big advantage of the One Tax Code for Homes solution is that, after it’s implemented, it doesn’t depend on bureaucrats having to make good decisions.
The goal here is to give the Fed, or a Central Housing Bank, the tools to stabilize house prices, and to stabilize and increase the wealth of Americans.
But I expect critics will focus their attention on all the problems with changing mortgage policies in order to distract attention away from the simplest and best partial solution, having One Tax Code for Homes, for single-family homes and condos.