Housing Market Still Needs Government Support

There is no immediate action on Fannie Mae and Freddie Mac in the offing, but the knives in Washington are clearly out for the two mortgage behemoths, whose failings and excesses helped foster the housing crisis. In fact, there are still some lawmakers who would dissolve any public support for home ownership. To buttress their position, these conservative voices like to trot out — and often twist — the policies of other countries. They claim that government-sponsored entities like Fannie and Freddie are unique to the U.S., the only country that doles out homeowner tax incentives. They would be wrong on both counts.

However, Britain and France, two countries cited as maintaining a hands-off approach to housing, have recently signaled their support for homeownership. When Britain passed its radically austere budget /node/49808 last month — the most drastic spending cuts since World War II — Prime Minister David Cameron, a free-marketeer to the bone, wrote in a modest government subsidy intended to assist first-time homebuyers. And Nicholas Sarkozy, /node/50510 the French president and another devotee of fiscal rigor, did something similar when his austerity package went through after the 2008 crisis. In it was a tax break extended to homeowners. Again, the amount was tiny, but the point in both cases was: Yes, the government does have some role to play in building a healthy housing market.

Britain and France were responding to the same crisis that the U.S. still wrestles with: a drastically deflated housing sector that left plenty of blood on the floor from banks, overextended homeowners, and taxpayers who bailed out Fannie and Freddie to the tune of more than  $135 billion. /node/50492 Comparing the U.S. system to those of other nations is already part of the conversation, and we are sure to hear more about practices elsewhere in the industrialized world as experts and policymakers from all points on the political spectrum weigh in.

But while making use of international comparisons when figuring out what’s wrong and what’s right about the U.S. system is a useful exercise, it is also a tricky one. Often such comparisons can be manipulated to demonstrate what any ideological ax-grinder wants them to mean.

Canada: It has no Fannie Mae or Freddie Mac and enjoys a home ownership rate of 68 percent, a shade above the U.S. rate (now 67 percent). So that’s that: We can do without Fannie and Freddie — an argument already made in congressional testimony.
Well, yes and no. Canada has no Fannie or Freddie active in the market, but it has the Canada Mortgage and Housing Corp., which guarantees almost every mortgage written in Canada. That underpins the market in much the same way that Fannie and Freddie do.

Britain: The British government takes no role in housing finance, and mortgages are customarily adjustable on a frequent basis. The homeowner, not the lender, bears the risk of changed market conditions. This notion — that everything can be left to the banks — has also seen the light of day already.
Yet Cameron has just put the lie to this argument. Though it is true enough that the British government has traditionally played no direct role, building societies and lending institutions (which do not securitize mortgages in the U.S. fashion) are government-guaranteed, thus helping to keep the market liquid. And because many mortgages are not sold into secondary markets, borrowers are accustomed to lending institutions passing on market-related risks.

The point to grasp is that no nation’s system is directly comparable with another’s because housing cannot be seen in isolation. How home ownership is financed is embedded in a broad array of social and economic arrangements that fit together–as Barry Zigas, director of housing policy at the Consumer Federation of America,http://www.consumerfed.org/ puts it–“like a Swiss watch, each part affecting all the others.” In the British case, the government guarantees heath care, tertiary education, and pensions, among other things.

“The fact is, government involvement in these other areas makes it easier for people to spend more on housing and take on more risk,” Zigas says. “To pick housing out of this environment to suit an ideological point is misleading. In the U.S., the single thing the government helps to make affordable is a mortgage.”

It may be some time before any decision is made as to how the American housing-finance system is reconstituted and how (or whether) Fannie and Freddie are replaced. The question will get no floor time in the House this year; the Senate is committed only to lengthy hearings, and the administration cannot act on its own.

None of this means we ought to stop listening and debating.

“Until now we’ve had bold pronouncements and denouncements and efforts to lay the blame,” says Zigas. “Now we’re moving to the phase of sober consideration, and it’s way too early to speculate as to what alternative will come out of it.”

Despite political inducements to make mortgages more accessible to a wider swath of the populace, few defend the excesses of Fannie and Freddie in the years before they tipped into insolvency — especially those eight-figure salaries for top executives. And it’s even harder to find excuses for their lemming-like behavior in following the banks into the folly of the sub-prime market.

Still,  the wretched performance of Fannie and Freddie’ during the bubble years does not mean their core functions — to make home ownership accessible to a higher proportion of Americans than would be the case without them or something like them — are dispensable.

True, Fannie and Freddie are unique institutions in housing finance; no other nation has anything quite like them. But all industrial countries (and many developing ones, too) recognize home ownership as desirable, economically and socially, and one way or another give government a role in promoting home ownership.

In home ownership, America is in the middle of the pack among industrial nations. Spain’s rate is 85 percent and Belgium’s 78 percent; Britain is at 68 percent, Japan at 61 percent, and France at 57 percent. But the truly interesting comparison is between the U.S. before and after Fannie Mae was launched in the 1930s. It makes you glad to be young (relatively).

Until Fannie came along, and later on Freddie, home ownership was the privilege of the few. Down payments were 50 percent or more and the typical mortgage was for five to 10 years, with a “bullet” payment due on all principal at the end of term. The home ownership rate was somewhere around a third.

Any such rate now “would not be politically acceptable in an American setting,” as Alex J. Pollock, a fellow at the American Enterprise Institute, put it in a Senate hearing last autumn. Translation: Fannie and Freddie may now be breathing their last but replacing them with  nothing is not an option.
Related Links:
The American Mortgage in Historical and International Context (Social Science Research Network)
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=908976
Comparison of International Housing Finance Systems (U.S. Senate)
http://www.aei.org/docLib/Testimony-Comparison-International-Housing-Finance-Systems-Pollock.pdf
A Responsible Market for Housing Finance (Center for American Progress)
http://consumerfed.org/pdfs/responsiblemarketforhousingfinance.pdf
Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market (Congressional Budget Office)
http://www.cbo.gov/doc.cfm?index=12032