How Much Has the Government Subsidized the Mortgage Market?

by: Casey Mulligan

By subsidies, I mean the ex poste increase in the net worth of owners of mortgages, or pieces of mortgages, as the result of:

  • Government purchases of mortgages, pieces of mortgages, and liabilities of funds and institutions that own mortgages or pieces of mortgages, in excess of their market value. It's the excess over market value that counts as a subsidy. For example, most of the $100+ billion the government paid to AIG was a subsidy, because what it got in return was essentially worthless (from the market's point of view). The $700 billion TARP would not be all subsidy, but the Treasury received some positive value assets in return. On the other hand, I would say that Goldman Sachs (NYSE:GS) received a TARP subsidy, even though it eventually paid the money back with interest, because the government paid more than market price for its Goldman Sachs securities (e.g., in another state of the world, Goldman Sachs never pays back).

  • The increase in the net worth of the owners of mortgages due to the fact that mortgage lenders are permitted to discriminate in their modifications on the basis of borrower tax returns (thereby depleting federal, state, and local Treasuries of income tax revenues).

I have seen various estimates of government monies disbursed, and committed:

These amounts are $3-8 trillion. However, much of that is not a subsidy (see above), and these total entirely exclude the implicit subsidy occurring through mortgage modification.

Luke Threinen and I calculated that the U.S. housing market crashed a total of $5 - 8 trillion (difficult to know exactly, because housing price indices disagree so much on the amount of the price reduction). So it's easy to see that government paid for 25% of that loss, and conceivably paid for 50% or more.

Commenters: have you seen any studies of the amount of mortgage market subsidies?