Norbert Michel, director of Heritage’s Center for Data Analysis testified before the House Financial Services Committee on Dec. 21, 2018. The topic of his testimony was major shortcomings of government involvement in the U.S. housing finance system.
Michel was one of just two witness that appeared before the committee that wasn't representing a special interest group.
Below is the video and transcript of his full testimony
NORBERT MICHEL: Chairman Hensarling, Ranking Member Waters, Members of the Committee, thank you for the opportunity to testify today. My name is Norbert Michel and I am the Director of the Center for Data Analysis at The Heritage Foundation. The views I express in this testimony are my own; they should not be construed as representing any official position of The Heritage Foundation.
It has been 10 years since the GSEs, Fannie Mae and Freddie Mac, failed and were placed into government conservatorship, and yet Congress has failed to act to reform the housing finance market and protect taxpayers.
While some may find it encouraging that Congress seems to be heading toward a bipartisan reform package, Americans should be scared – legislation such as the Bipartisan Housing Finance Reform Act of 2018 is built upon a naked giveaway to special interests from the housing and financial industries. Nothing more.
It’s also dangerous because these so-called reforms will perpetuate and exacerbate the worst parts of the current housing finance market – and Americans deserve better.
The key component of these so-called bipartisan reform packages is an explicit government guarantee for mortgage backed securities. This mechanism simply means that the federal government will begin explicitly guaranteeing the principal and interest payments on otherwise private investments, and forcing borrowers to pay for it.
All for no real public purpose. Nominally, these guarantees will be marketed as necessary for creating a sustainable housing finance system, but government guarantees to private investors do exactly the opposite – they create excessive leverage and overinvestment precisely because investors no longer have to pay close attention to risk.
Sadly, history clearly shows that these guarantees are not necessary to sustain the housing market.
During the last five decades the U.S. achieved a stable rate of home ownership of approximately 64 percent without explicit guarantees, and the only major deviation from that rate was when wrong-headed government policies were enacted with the express intent of arbitrarily raising that rate to 70 percent by increasing the “implicit” guarantees.
Predictably, that scheme did not work as intended and ended in a spectacular failure – there is no doubt that the constant expansion of implied taxpayer guarantees helped to create excessive debt and home building leading into the 2008 crisis.
Doubling down by making these guarantees explicit is destined to end just as poorly.
All sorts of special interests have been spending the last few years scaring people on Capitol Hill, as well as on Main Street, so that they can secure additional funds for their clients – but the truth is that robust homeownership was established in the U.S. long before the government became heavily involved in the housing market.
From 1949 to 1968, the year that Fannie was allowed to branch out into purchasing non-government insured mortgages, government backed home loans never accounted for more than 6 percent of the market in any given year.
Yet, the homeownership rate was 64 percent in 1968, virtually identical to the current rate. There simply is no compelling need, from either existing or potential homeowners’ perspective, for these guarantees.
Borrowers and lenders like to take risk because it provides the possibility of a future financial reward. Shifting these financial risks onto taxpayers is what causes systemic risk and financial crises. I fear that many in Congress have forgotten this lesson even though it was crystal clear in 2008. So, for the sake of completeness:
Shifting these risks on to taxpayers is why investors didn’t care what was in their portfolio.
It is what created excessive leverage.
It is what created overbuilding in the housing sector.
And it was pushed home prices to unsustainable levels.
The results will be just as tragic next time if, in fact, they have forgotten this lesson – and it is almost inconceivable that Congress would be contemplating a repeat of this mistake.
The Bipartisan Housing Finance Reform Act of 2018 does revoke the charters of Fannie and Freddie and runs them through receivership – and that’s a great policy idea. But there’s little else to like. So, as I suggested in my written testimony, if this is the best that you can do, you should do nothing.