Forced to listen to Diane Rehm show today on home ownership, Fannie, Freddie etc. The show was very boring but I thought some points could be related to our ongoing discussions about the middle class etc.
Sarah Rosen Wartell from the Center for American Progress repeatedly brought up the point of the unpredictability of interest rates for borrowers. She said it was vital for borrowers to know what they would pay in five years, which they can’t do with an adjustable rate mortgage. In her opinion a completely private market would eventually give up offering long-term fixed rate mortgages.
I agree. I do not understand how those who condemn borrowers expect them to know what their rates will be in the future on the basis of the behavior of the Federal Reserve Board of Governors.
Before the dollar was delinked from gold in 1972, the Federal Reserve did not have to use interest rates to hit a separate monetary target or employment target. It is no accident that interest rates were far more stable during that time and home ownership was much less of a gamble.
More government involvement to provide long-term mortgages however simply leaves the taxpayers to cover the spread. Left alone, people will not borrow as now they understand that their mortgages could always be hit by lighting in the form of some Fed action that they have no way to anticipate and no control over. This is hardly confined to mortgages though.