An American dream: government gets out of housing

January 3, 2011

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.


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If you haven’t already, read Raghuram Rajan’s latest book, Fault Lines. He doesn’t really say anything you don’t know already, but he looks at it from a different perspective. What he gave me was a vision on the whole credit thing from a perspective that pulled together a lot of things I knew, but hadn’t spend much time organizing.

Bottom line, yes, the U.S.G. can exit subsidizing mortgages. It can spend the money on prison guards and increasing security to deal with the shooting class war that will result instead.

Posted by ARJTurgot2 | Report as abusive

Reuters, just like the mantra coming out of the conservative think tanks, conveniently ignores the HUGE subsidy real estate commercial investment receives. Ever heard of 531 exchanges? That’s where the gains on a commercial property are NOT taxed if the proceeds go into another property. If that isn’t a pyramid scheme.

Another HUGE subsidy is that real estate partnerships avoid cap gains taxes until the partnership is dissolved and then the IRS has only that one year to be sure it gets paid. Look at the special tax treatment REITs receive. The list goes on and on.

And finally the HUGE tax abatements commercial property developers receive cities, states, etc. to develop properties. Don’t we all agree that in a free open capitalism that if a project isn’t profitable in itself, it should NOT get subsidies. Let’s be honest, did Goldman Sachs need a tax abatement to build a new HQ?

The individual homeowner is the one who foots the bill on these subsidies with higher and higher real estate taxes due to loss tax revenues. Yet Obama’s budget commission, Reuters, American Heritage, etc. seem to conveniently overlook the largess commercial real estate receives.

Case in point. My 1100 sq. ft. coop in Chelsea NY pays $13000 in real estate taxes, while a brand new $10 million, 5000 sq.ft condo unit built in 2006 right down my street pays $800 due to tax abatements. BTW, my real estate taxes in year 2000 were $4000. Thank you Bloomberg for shifting the tax burden to the little guy.

Posted by Acetracy | Report as abusive

I just barely short sold my house in Nevada becuase it had lost 58% and had left me with no money left to live. There is a problem with the system when a hard working middle class person can’t maintain paying their mortgage. As Americans, we need to fight to keep government out of our mortgage industry even if that means renting for a couple years while you save up! We need to reorganize our priorities and regain our financial responsibility or risk losing everything, not just our houses!

Posted by Welchjenn | Report as abusive

Anyone looking to buy a house and have their mortgage through a Banking service or help from the Goverment is only gonna lose their homes in the coming years.With all the fraudulent activity (through The BANKS) and Goverment personals (incompiatent) not performing their dutys to the customers,this housing market will always come to a crash.My home is a FHA loan and I couldn’t get help to save my home,cause of the fraudulent activity through Lend America selling it to Wells Fargo without a finished appraisel,no FHA home inspection and house being sold to us over the market value($60,000 more then what it was worth).And all the covering up from MY Real Estate Agent that was also working for the seller and working with the Loan Officer from Lend America.Buying a home exsperiance has become a living nightmare.

Posted by ctdeihl | Report as abusive

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