Redistributive Credit Policies Won’t Fix Inequality

e21-imageEconomic Policies for the 21st Century
December 30, 2014
by Charles W. Calomiris and Stephen Haber

Mel Watt, Director of the Federal Housing Finance Agency, recently announced that he will reduce the minimum mortgage down payment requirement for Fannie Mae and Freddie Mac – the housing financing behemoths that he controls as their conservator since the financial crisis – to three percent. This marks a return to pre-crisis down payment standards, and a departure from the traditional 20 percent requirements that had been standard prior to the 1990s, and which had once again become the norm since the financial crash. The stated goal is to expand opportunities for low-income borrowers, and thus help to mitigate economic inequality. But intentions and consequences can be very different. Similar attempts to subsidize risky mortgages in the 1990s and 2000s ended up increasing inequality. Congress should be wary of allowing Director Watt to take such a step.

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