There’s nothing like a “good crisis” to give the federal government an opening to spread its tentacles further into private markets. Just look at the vast growth of federal housing programs since the 2007-2009 financial crisis.
Fannie Mae and Freddie Mac alone have added two housing slush funds on top of more nebulous regulatory requirements such as a “duty to serve” affordable housing credit to “underserved” markets. These are only a few examples of the array of federal affordable housing programs ginned up in the past eight years.
Washington has enormously expanded its influence over the nation’s housing finance system, in some cases enacting reforms that actually compound the policy errors that triggered the last housing market collapse.
Now, to add insult to injury, the Federal Housing Finance Agency has decided to implement a mortgage forgiveness program for severely delinquent loans guaranteed by Fannie Mae and Freddie Mac. It’s unlikely to work.
The FHFA’s forgiveness program is an additional intervention to prevent foreclosure for underwater and severely delinquent borrowers “still struggling in the aftermath of the financial crisis.” The agency estimates that, under one likely scenario, it could cost taxpayers up to $17 million.
Certainly we all can sympathize with “underwater” homeowners — those whose homes are now worth less than the payoff amounts remaining on their mortgages. It’s a distressing — and financially stressful — situation to be in. But academic research and federal agency program-performance data indicate that resetting mortgage payment terms on severely delinquent loans seldom produces the desired happy ending. Many of these homeowners will still wind up delinquent on their mortgages, and many still may wind up losing their homes.
Thus, the FHFA’s new program will likely provide only a temporary semblance of “stability” for delinquent homeowners.
The principal forgiveness policy would also enlarge the system of federal subsidies that has pushed more homeowners into mortgages guaranteed by Fannie Mae and Freddie Mac — unwisely increasing the vast apparatus of federal government intervention in the housing finance system that has accelerated since the financial crisis.
The reach of federal subsidies has extended to millions of mortgage modifications administered through the Making Home Affordable initiative, which includes the Home Affordability Refinance Program and the Home Affordable Modification Program. Fortunately, both are set to expire at the end of this year.
Ironically, the government’s interventions in the housing finance system have myopically had the effect of providing homeowners and taxpayers with a false sense of security about the timing and the level of mortgage debt they can prudently assume. This has encouraged many individuals to take on more home loan debt than is sustainable, given their circumstances and risk characteristics.
Put differently, by subsidizing exceptionally high-risk home loans, the feds’ so-called affordable housing policies have created moral hazards in the housing finance system. When the loans fail, it undermines homeowners’ ability to achieve responsible ownership.
In any event, the federal government simply cannot afford to engineer such a backstop for homebuyers who have waded in over their heads. Nor is it fair to ask taxpayers who are responsibly paying off their own mortgages to subsidize others who have incurred excessive loans.
Government interventions always produce unintended consequences, which government then promises it will clean up through additional interventions. The free market does a far better job of providing affordable and sustainable housing opportunities for individuals — without imposing the cost of federal bureaucracy and lending losses on taxpayers.
To clear the way for a free enterprise housing finance system, the federal government should simply get out of the business of trying to provide so-called affordable housing opportunities for homeowners, whether it is subsidizing their way into mortgages or attempting to maintain homeowners’ ability to service unsustainable loans. Specifically, Congress should shut down government-backed institutions like Fannie Mae and Freddie Mac and abolish the FHFA’s mortgage forgiveness policy and any similar mortgage relief subsidy program.
This commentary first appeared in the Washington Times.