Last week in this space I suggested that Fannie Mae and Freddie Mac be retained with government backing but with a new mission: to eliminate market dysfunction.
A reader responded: "Shifting control of appraisals to borrowers and requiring lenders to purchase and pay for any insurance that protects lenders would help borrowers, but these changes would not create a competitive market in home mortgages."
The reader's point is that the measures I proposed would not create a competitive mortgage market, and she is right about that. I meant my proposals as examples of what could be done, but they are not a complete package. I will remedy that shortcoming here by describing the most important barriers to effective competition in the home mortgage market, and how Fannie and Freddie could remove it.
Here are the barriers:
Multiple price determinants: Last week I shopped for a book on-line. To do it effectively, I needed to learn from the booksellers I contacted only the price and the shipping charge. What I intended to do with the book did not affect the price. What a pleasure!
With a mortgage, in contrast, the price is affected by everything connected to its use and features that might affect a borrower's capacity or willingness to repay it. Here is a partial list:
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-- Type of property (single-family or 2-, 3- or 4-family)
-- Loan purpose (purchase or refinance)
-- Use of property (primary residence, second home or investment)
-- Loan amount required