Taxpayers on the Hook: The Politics of Government Guarantees in Home Mortgage Markets in Germany and the U.S.

Why do some governments guarantee home mortgage debt while others do not? Governments may provide direct mortgage insurance or government guarantees to banks and investors, so as to stimulate mortgage lending at lower mortgage rates. This paper contrasts home mortgage market subsidies in the U.S. and Germany. Scholars often assume that the U.S. is less likely to allocate resources through government programs than Germany. Yet, the home mortgage market in the U.S. is much more “socialized” than its German counterpart. The U.S. government currently covers roughly US$5 trillion in homeowner debt, a practice that dates back to the Great Depression. The German state also introduced subsidies in the home mortgage market as part of government programs to stimulate housing after WWII (on a smaller scale), but scaled down its subsidies until the 2000s. What explains this puzzling variation? This paper argues that two central factors explain the generosity of home mortgage subsidies: first, the economic growth model of a country sets the basic parameters behind the politics of homeownership. Second, party politics in the context of each country’s veto points determines what home finance policies are adopted within these parameters. The result is generous mortgage subsidies in the U.S., with a narrow policy space for reform, and more flexible subsidies in Germany in a wider political space. This study analyzes primary historical documents (e.g.,archival material and congressional/parliamentary records) and interviews with policymakers. The paper has larger implications for how to think about the connection between welfare states and financial markets.