Wednesday, July 21, 2010

Size of the Mortgage Subsidy: Update

Banks are often ridiculed for making home loans in the mid 2000s, when supposedly they should have known that housing prices would fall.

But banks were in a "heads: I keep all the winnings, and tails: I share the losses with taxpayers" situation, and it was rational to downweight the probability that housing prices would fall. This article quantifies some of the taxpayer help mortgage market participants expected in the contingency that housing prices fell.

Today that was updated by the TARP's Special Inspector General, who increased the subsidy estimate by $500 billion!.

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