As policymakers take another crack at housing finance reform,
Like clockwork, a recently released discussion draft of a Senate housing finance reform bill says the ongoing “guarantee backed by the full faith and credit of the Federal Government” will lead to the “continued availability of an affordable, fixed rate, pre-payable, long-term mortgage loan, such as the 30-year, fixed-rate mortgage loan.”
Unfortunately, the scare tactics that federal policymakers and affordable housing advocates repeatedly use to try to preserve the 30-year fixed mortgage and federal guarantees of the mortgage market rely on misleading narratives and not the experience of history.
Despite the facade of a free market, the federal government has long been entrenched in the U.S. housing finance system, certainly including the persistence of taxpayer-financed government guarantees in the mortgage market. The U.S. is unique among developed international nations in the
Federal taxpayers cover the cost of direct government mortgage insurance agencies (the Federal Housing Administration, the Department of Veterans Affairs and the Rural Housing Service), a direct government mortgage guarantor (Ginnie Mae), and the housing finance government-sponsored enterprises (Fannie Mae, Freddie Mac, and the Federal Home Loan banks).
The U.S. is also among
Combined with other taxpayer-financed subsidies such as the federal mortgage interest-rate tax deduction, these subsidies have had negligible impact on the actual rate of homeownership in the U.S. while encouraging American households to take on higher levels of mortgage debt in the purchase of larger and more expensive homes.
The U.S. homeownership rate has in fact
Back when that rate was on the rise, the free market had a greater role in mortgage finance. The substantial increase in the homeownership rate until 1960 occurred in the absence of the U.S. securitization market (which
In addition, for all of the taxpayer largess
The 30-year FRM has remained a staple product in the U.S. housing finance system for several decades and, because of the path-dependency in this market, will likely remain a viable mortgage finance instrument — even in an alternate world without government guarantees.
In the U.S. jumbo mortgage market, 30-year FRMs are originated without explicit government guarantees since they are valued higher than the eligible limits to receive government backing. Their rates are competitive (even lower at times) than those backed by the federal government. In fact, about
While homeowners can benefit from very long-term FRMs, it is erroneous for federal policy to assume that these mortgage finance instruments will work best for everyone.
These products generally
All told, despite any best intentions, government guarantees have crucially
Indeed, over the last several decades as the 30-year fixed-rate mortgage has become the predominant financial instrument in home purchases, homes have become
As federal reforms of the U.S. housing finance system advance, federal policymakers should avoid