By Robert Schlesinger |
We've all heard the saying, "There is no such thing as a free lunch." Well, when it came to U.S. taxpayers backing the U.S. mortgage market, we really learned that lesson the hard way. In 2008, the biggest Wall Street bailout of all time occurred when the U.S. taxpayers stepped in and rescued the two federal mortgage giants, Fannie Mae and Freddie Mac. Since that bailout, close to $200 billion of hard-earned taxpayer money has been pumped into these two companies to keep them afloat.
Now, House Republicans are beginning to move legislation that would finally end this gigantic taxpayer bailout and significantly reduce taxpayers' exposure and risk going forward. The House Financial Services Committee, under the direction of Chairman Jeb Hensarling of Texas recently passed the Protecting American Taxpayers and Homebuyers, or PATH, Act.
The PATH Act would transition our U.S. mortgage market from one which solely relies on government support to one where the risk is held primarily by the private sector. More specifically it:
As housing finance reform finally begins to move forward, the central area of debate pertains to how much U.S. taxpayers will subsidize the housing market. Some argue that if Fannie and Freddie are eliminated and not replaced with something similar, the U.S. housing market will collapse and only the wealthy will be able to buy a house. This is simply not true. Other consumer lending markets for other asset classes such as auto loans and credit cards have performed very well and have provided credit to all types of consumers throughout the economic downturn without a government guarantee.
And, even without Fannie and Freddie, the U.S. housing market still receives trillions of dollars of subsidies from taxpayers through the Mortgage Interest Deduction, FHA, Veterans Administration, U.S. Department of Agriculture's Rural Housing program, HUD's Section 8 program and the Federal Home Loan Banks. The PATH Act does not remove any of these subsidies.
The PATH Act does however begin to rein in some of the over-subsidization of the housing market by transitioning away from a broad multitrillion dollar guarantee over the entire housing market. Government guarantees unavoidably set in motion a chain of market distortions and moral hazards that start with a boom, lead to a bust, and end in a bailout. A government guarantee lulls home buyers, lenders and investors into thinking that housing is a safe, foolproof investment, which we know all too well it is not.
Government guarantees can lead to lower rates on mortgages, that it true, but that is only one part of the picture. Mortgages become cheaper because some of the risk that private investors would take, for a price, is being put on the American taxpayers. Even if the government charges for this risk, over time there will be great pressure to reduce these charges well below the amount needed to insure the actual risk. Wall Street, housing industry groups, and affordable housing advocates all will have an interest in lobbying Congress to reduce these charges as much as possible. No lobbyists will advocate for the American taxpayers, who will end up paying for it all in the end.
As we saw in the recent housing bubble, a government guarantee, even an implicit one, artificially inflates the price of housing. That may sound good at first, but who is really better off with higher home prices? Certainly not buyers. They have to put together a larger down payment and take on more debt. Lenders and mortgage investors do not clearly benefit either. A bubble that bursts only ends up saddling homeowners, investors and taxpayers with hopelessly underwater bad loans. From experience, we know that the guarantee leads to an underestimation of credit risk, which did in many lenders during the recent financial crisis. The home seller may benefit from government inflated home price, but that potential benefit is negated if they intend to buy another home. Moreover, if the seller has kids, they may end up living with their parents longer than planned because they can't afford to move out.
Government guarantees are especially bad for the poor. Higher home prices are less affordable home prices. Those who advocate government guarantees to make housing more affordable are actually having the opposite, perverse effect. With extensive government guarantees, we create a cycle of artificially high prices and a greater need for housing assistance, which must be paid for with either higher taxes or deeper government debt. Much of the cost of this assistance will be borne by renters, who pay only the costs and receive none of the benefits.
Perhaps worst of all, government guarantees are bad for the economy. With so many personal and government resources devoted to housing, there is less available individual and societal capital for other worthwhile things. If we want a country with less investment in education, health care, entertainment, charity, scientific research or entrepreneurship, by all means, guarantee the mortgage market. On the other hand, if we want a country with a more sustainable housing market, not subject to the booms and busts of the past, then we must pass the PATH Act.
About Scott Garrett Republican Representative From New Jersey
Julia Gordon Director of Housing Finance and Policy at the Center for American Progress
Chris Estes President and CEO of the National Housing Conference and Center for Housing Policy
David Min Assistant Professor at the University of California, Irvine School of Law
Mark Calabria Director of Financial Regulation Studies at the Cato Institute