Economic Analysis of Social Issues 1st Edition by Alan Grant

Exercise 30

[Related to Application 18.2 on page 393] The U.S. government chose to encourage homeownership by creating Fannie Mae (1938) and Freddie Mac (1970), which purchase home loans made by banks for lump sums of cash. For banks, this created an incentive to make higher-risk loans than they would have had they been fully responsible for the loans. Can you think of a different way for government to have encouraged homeownership that would not have created such a disastrous set of incentives?