Reference no: EM133123041

The US Federal government has historically been involved in and has assisted the mortgage markets. Tax incentives, such as deduction of some or all of interest paid, make mortgage borrowing less expensive, thus increasing demand for mortgages. This results in encouragement of investment in mortgages at the cost to other forms of investing.

Another area of government involvement is Government Sponsored Enterprises (GSEs) such as Fannie Mae (FNMA) and Freddy Mac (FHLMC). With implied government backing, they are perceived to have low risk. Yet, as far back as the early 2000s, former Federal Reserve Chairman Alan Greenspan stated that these institutions ("Fannie" and "Freddie") were a source of risk to the economy because of their ties to government and their extensive use of debt to finance growth.

In general, discuss what you think the role of government should be in the mortgage markets. Some questions that can be considered:

-How does the resulting increase in funding for mortgages and decrease in funding to other capital markets affect the economy?

-Are the current allowances of mortgage interest tax deductions optimal?

-Has the government been effective in achieving its original objectives and are those objectives still relevant?