A new mortgage plan?

I am not sure whether this article is describing progress, or lack of progress, but here was one interesting bit:

One potential compromise described in current drafts of the administration’s proposal would reduce the government’s role to a last line of defense for the mortgage market. A version of this idea has been advocated by David S. Scharfstein, a finance professor at Harvard who previously worked as an adviser to Mr. Geithner.

The core of Mr. Scharfstein’s proposal is to create a new government-owned corporation for the sole purpose of providing guarantees to mortgage investors. During normal times, the insurer would guarantee no more than 10 percent of mortgages, but in times of crisis, the government could raise that cap, offering guarantees to a broader range of investors so that money continues to flow into the mortgage market and credit remains available.

This plan is a good example of why public choice analysis remains an underrated field in economics.  How are these restrictions self-enforcing in light of special interest and electoral pressures?  Along related lines, Arnold Kling has interesting comments on Peter Wallison.


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