An American dream: government gets out of housing
Could the U.S. government stop subsidizing mortgages altogether? Probably not in real life. But that is where the debate over reforming Fannie Mae and Freddie Mac, as well as righting the public-private sector balance in housing, should begin.
This unlikely dream imagines the government out of the business of guaranteeing housing finance within 10 years. That should be long enough to phase out subsidies slowly, preventing the still fragile housing market from dropping further. It would give private-sector banks time to absorb an estimated $5 trillion of government-backed mortgages. And it would wean homeowners gently off the subsidized financing they’ve grown accustomed to. Just as importantly, though, 10 years is short enough to focus minds now.
The Treasury, due to propose ideas for Fannie and Freddie in January, has been prevaricating for two years. And the indecision has made the not-so-dynamic duo more powerful. They currently guarantee the highest percentage of U.S. home mortgages seen in the last 20 years, according to Barclays. They enjoy unlimited access to taxpayer funds and have expanded their affordable housing mission to include the well-off.
By laying out a clear exit plan in 2011, legislators could reverse the expansion that has already sucked down more than $150 billion of taxpayer funds. It would also make it easier to roll back emergency measures put in place at the height of the recent crisis. For example, Fannie and Freddie are still guaranteeing loans for as much as $730,000 in high-cost areas, even though the private sector is again strong enough to provide loans to rich homebuyers. Without a deadline such temporary measures risk becoming permanent.
While they are at it, U.S. lawmakers should consider ending the deduction of mortgage interest for tax purposes. It’s another subsidy for home ownership — though it probably partly defeats itself by making homes more expensive at the same time as it makes mortgages cheaper.
Most important, though, is to start by re-examining the policy goals underlying today’s subsidies: how far should the government push home ownership, and how much support for affordable housing should be focused on buying rather than, say, renting. The usual Washington tinkering with the status quo isn’t enough. To create a new, sustainable American dream, lawmakers need first to wake up.