For millions of Americans, the prospect of home ownership has always been a near-irresistible lure that conjures ideas of white picket fences, children frolicking on impeccably manicured lawns, and cars parked in paved driveways. To be sure, a house is more than simple bricks and mortar: it’s a place most call home. But the picturesque images almost never address what a home really is: a physical asset, and in the case of many mortgage-holders, an obligation to pay.
On Tuesday, the Obama administration convened a conference of housing finance experts to cogitate on the future of Fannie Mae and Freddie Mac, both of which have been transformed into zombies subsisting on taxpayer funds totaling nearly $150 billion to date. Although no concrete plan is expected to emerge before next year at the earliest, Treasury Secretary Timothy Geithner vowed Fannie and Freddie would not assume the public-private hybrid that led to their demise in the first place. Unfortunately, government funding of the companies is likely to continue for the foreseeable future.
Geithner’s remarks betray a fundamentally flawed – albeit bipartisan – approach. For decades, both Democratic and Republican-led governments adopted an official policy that emphasized the positives of home ownership. These efforts spawned a dizzying array of subsidies, incentives and other policies that created a sense of false security in homeowners – but studiously downplayed the stark realities. Which is the fate of Fannie and Freddie is so politically sensitive, even in light of their central role in the global financial meltdown of 2008.
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In the wake of successive bailouts, soaring foreclosure rates and stubbornly high unemployment, calls to unwind the two mortgage giants are growing louder by the day. The debate over the future of Fannie and Freddie has also sparked a fraught yet long overdue debate about the appropriate role of government involvement in the housing sector. The end result may redefine how citizens think about who home ownership, which over the years has come to be viewed as an entitlement by middle-class families and the working poor alike.
An estimated 67 percent of Americans own homes in 2009, down from a 2004 peak of 69 percent and the fifth consecutive year of decline. Given the lack of income growth and employment opportunities, this rate may yet fall further. As policymakers mull the fate of Fannie and Freddie, an increasing number of market observers are reaching a painful yet logical solution to the housing market woes: foreclosures should be encouraged, not prevented.
Even as mortgage rates remain near record lows, the Washington policy establishment is discovering that attempts to stimulate the moribund housing sector have been futile. This includes the Federal Reserve: last week, the central bank indicated it would no longer add to its vast holdings of mortgage-backed securities. Some reports suggest that central bankers are discomfited with the prospect of continued support of the moribund housing market.
In fact, the costs of the government’s housing market intervention often outweigh the benefits. A thoughtful article in a July edition of National Review magazine underscores many of the perverse incentives created by federal intervention in the housing market. The authors cite data by Office of Management and Budget (OMB) that show mortgage-interest rate deductions will cost $637 billion over the next five years. Over the course of a decade, these subsidies will deprive the Treasury of approximately a trillion dollars – a hefty sum when the government is staring at a horizon drenched in red ink. These estimates dovetail with Congressional Budget Office estimates showing the rescue of Fannie and Freddie will reach nearly $400 billion.
As publicly-traded but government-sponsored entities, Fannie and Freddie were at the fulcrum of government efforts to expand the housing sector to the working class and people of color. The housing behemoths injected liquidity into the market by buying mortgages and securitizing them into instruments that were sold around the world. Admittedly, there was once a certain logic Fannie and Freddie’s mission of keeping mortgage rates low and expanding ownership opportunities. But in their current state, Fannie and Freddie resemble Enron-esque off-balance sheet vehicles instead of the highly regarded financial institutions they once were. They are less a facilitator of housing market stability, and more of an impediment to an eventual economic recovery.
Owning a house is clearly integral to the American dream. But after a brutal recession, policymakers have rightfully begun to recalibrate their longstanding role in encouraging home ownership. This is a belated but welcome acknowledgment that a more common-sense approach is needed in trying to expand home ownership. The inescapable reality is that far too many people live in homes they can no longer afford. This is why efforts by the Obama administration to prop up the housing market have failed so spectacularly, particularly in working class neighborhoods beset by high unemployment. Predatory lending practices certainly played a role in the housing bust. But the hard but often ignored truth is that during the boom, the prevalence of cheap credit and loans geared toward lower-income borrowers created a sense that home ownership was a right rather than a responsibility. For many home owners who find themselves under water, a return to rental arrangements or sharing living space may be the most feasible option.
Mystifyingly enough, Fannie Mae and Freddie Mac escaped the tendrils of financial reform. Clearly, their gradual dismantling would go a long way toward nudging the housing sector and overall economy toward recovery. Yet the debate over their existence is almost besides the point: home buyers themselves must be more realistic and responsible in their financial decisions. In the aftermath of the housing bubble, it is increasingly clear that decisions on home ownership must revert to a time where consumers needed to save, reduce personal debt and be sensible in assessing whether they can afford a mortgage. When considering the term “affordable housing”, consumers and policymakers need to place more emphasis on the former word and less on the latter.
