Fannie, Freddie, and Business Cycle Externalities

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What to Do with Fannie and Freddie

Part of the argument is that business cycle externalities have been overlooked:

... One of the biggest risks in mortgage markets is the business cycle, and the costs of business cycles fall disproportionately on lower and middle income households. These households feel the unemployment problem more acutely than higher income households, and much of the foreclosure problem is due to the millions of households who are now unemployed.

Because middle and lower income households are more vulnerable to business cycles, they are more risky to mortgage lenders. This causes these households to face higher down payments and higher mortgage rates than otherwise, and many are excluded from home ownership altogether. But there is no reason why these households should be forced to pay the full costs of these societal risks – business cycles are not their fault – so help for these households is justified. Government mortgage insurance for loan values below some threshold is not necessarily the best way to provide this help, but it’s one way to do it. ...