Government guarantees make housing market worse


Government guarantees make housing market worse

Feb 27th, 2014 3 min read
Norbert J. Michel, Ph.D.

Director, Center for Data Analysis

Norbert Michel studies and writes about financial markets and monetary policy, including the reform of Fannie Mae and Freddie Mac.
Does the housing-finance system require government guarantees? We’re often told it’s worked so well for so long that reforms should only tweak things. The market won’t survive, it’s said, if we completely eliminate those guarantees.

But the reality is that if the system had worked, we wouldn’t have had millions of home foreclosures. Taxpayers wouldn’t have spent $200 billion to save the government-sponsored enterprises Fannie Mae and Freddie Mac.

We tend to have short memories: The Fannie and Freddie that crashed in 2008 were a product of the mid-to-late 1990s, not the 1930s. Not even in the depths of the Great Depression did government policy go so far to distort private markets.

So it was encouraging to have President Obama late last year support shutting down Fannie Mae and Freddie Mac, the two enterprises that helped create that distortion.

But the devil is always in the details, especially in politics. So taxpayers should be aware that some of the same politicians who want to close down Fannie and Freddie also want to restart them under a new name.

The bill sponsored by Sens. Mark Warner, D-Va., and Bob Corker, R-Tenn., for instance, would close down Fannie and Freddie. But then it would create the Federal Mortgage Insurance Corp., a government agency that purchases home loans to provide liquidity for a secondary mortgage market. Sound familiar?

The FMIC itself wouldn’t issue mortgage-backed securities, but it would provide an explicit taxpayer guarantee to MBS holders against losses. In the proposal’s current form, 90 percent of those losses would be insured and covered by a mortgage insurance fund very similar to the FDIC’s deposit insurance fund.

The main difference between the proposed FMIC and the current Fannie and Freddie? Approximately 10 percent. Of course, that 90 percent “risk sharing” figure will likely have to grow for the bill to make it out of the Senate. There’s also the detail that the FMIC will serve as a new federal regulator in the housing finance market. That’s hardly an improvement over the old system.

In a similarly stealthy manner, Corker and Warner can happily tell constituents their bill eliminates the much-maligned affordable housing goals. It does, but it replaces them by tasking the FMIC with an even broader “duty to serve” all markets.

The basic idea is the same as the affordable housing goals: Lenders have a responsibility to lend money to virtually everyone. Market economies provide benefits to people when business owners earn profits, not when they have a specific duty to serve government mandates and social causes. Focusing on the latter has made our financial system less stable and needlessly saddled many Americans with enormous debts.

There’s very little to show for all this trouble. When the government-sponsored enterprises started in 1968, the homeownership rate was 64 percent. Although U.S. mortgage debt has grown by more than 80 percent during this time, the homeownership rate now stands at 65 percent.

That’s not enough to deter opponents of ending the GSEs. Some even use figures like this to argue for expanding taxpayer-funded “affordable housing” programs (though many of them are hardly affordable in the long run).

Corker-Warner expands these programs by enlarging two housing trust funds, both of which would provide a guaranteed source of taxpayer dollars for affordable-housing projects. Combined, these funds would provide approximately $350 million in the first year they’re operated, and the amount would climb annually.

But that’s still not enough for some. Housing and Urban Development Secretary Shaun Donovan recently called for a national affordable-housing fund of $5 billion – that’s with a “b” – per year. What Donovan and other affordable-housing groups always neglect to say, though, is that we already transfer more than $50 billion per year in federal tax dollars to various affordable-housing programs.

Since 2000, taxpayers have spent more than $630 billion on these initiatives (a figure that does not include programs through state and local trust funds, GSE subsidies, Ginnie Mae, FHA or VA subsidies). Perhaps it’s worth considering whether all these affordable-housing programs haven’t improved housing markets.

Removing the government guarantee from housing finance would likely bring lower housing costs, less personal debt, and higher personal income and savings. The government guarantees we’ve had in the U.S. housing market have distorted housing prices, encouraged debt, left taxpayers on the hook for trillions, and provided the impetus for millions of home foreclosures.

With that sort of record, it shouldn’t take this long to shut the GSEs down. Permanently.

 - Norbert Michel is a financial regulations research fellow in the Roe Institute for Economic Policy Studies at the Heritage Foundation

Originally appeared in the Wichita Eagle