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Comment by ig1 | Hacker News Reader

They're making the fundamental mistake of fixing a problem now in a way that will cause huge problems in the future.

Mortgage lenders will put huge premiums on mortgages in the town in the future because of "default by eminent domain" risk, if the government pulls freddie/fannie mae it'll be even more expensive. Basically they're robbing future mortgage owners in order to pay current ones.

Worse yet, other towns with similar profiles might have their risk profile increased too, so they'll get extra premiums because of Richmond's behaviour without getting any of the benefits.

So while it might seem like they're just taking the money from pension funds and other investors, in the longer term they'll be taking far more from future mortgage owners.

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If this system becomes routine, mortgage rates will go up, though I'm not sure about "huge premiums."

Is that a bad thing? The investment becomes risker and more expensive, so less money is available, so fewer mortgages are made. More people rent instead of buy their own homes. I would submit that fewer owner-occupied homes would be a positive thing for the national economy.

Fewer mortgages = lower property prices.

No mortgages = 10x lower property prices.

No mortgages = Detroit. The end result of this idea is not pretty.

> No mortgages = Detroit. The end result of this idea is not pretty.

The lack of mortgages did not cause the collapse of Detroit. The causation runs the other way.

The collapse of the auto industry led to the collapse of housing prices in Detroit, which in turn led to the collapse of the mortgage market. Who wants to issue mortgages for houses that are dropping in value?

> No mortgages = 10x lower property prices.

Without mortgages, housing would simply stabilize at the rental value. This will be lower than the current price -- but not anywhere close to 90% lower. The price floor would be the cost of new construction -- in other words, all the value in the structure, zero value in the land.

Instead of buying MBSes, investors who wished to have real estate exposure would simply supply capital to REITs that owned the properties directly. Banks would run these REITs for a fee, equivalent to the mortgage origination fee.

The equilibrium condition would not be objectively worse than the current equilibrium. You may have a subjective preference for an ownership society, but Germany does just fine with a rental society.

The problem is that it's socially costly to move from one equilibrium to another. If you go from the German model to the US model, then you hurt the renters. If you go from the US model to the German model, then you hurt the owners. You don't start out with a blank slate, so you cannot just pick an equilibrium.

If people can't get a mortgage on a property in this area, then house prices will fall. This effectively hurts all the people who have been paying their mortgages - which seems like an ineffective solution.

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