Notwithstanding the recent collapse of our government dominated housing finance system, the housing lobby is once again trotting out the usual arguments for all-encompassing federal guarantees: All homebuyers should be able to obtain high-loan-to-value mortgage loans on all houses in all areas of the country in all market conditions. A government guarantee is necessary to achieve that outcome. Private capital will be taking all the risk. Anyone who disagrees with us is anti-homeownership and is simply being unreasonable.
The problem is, almost every part of that argument is misleading, if not just plain wrong. Here's why:
The risk is higher than the housing industry says: Housing markets periodically melt down, so there are very large losses that happen infrequently. The industry likes to pretend that although meltdowns have happened in the past, they won't ever happen again.
The proposed levels of private capital won't protect taxpayers against the next meltdown: When (not if) the next mortgage meltdown occurs, the private capital in the various housing finance reform proposals will be wiped out very quickly. And taxpayers will be left holding the bag. Again.
It's about subsidy: The housing lobby wants keep secret the elephant in the room: their real intent is to capture subsidy. The federal guarantee is worth a lot more than it would cost the government to provide it, no matter who is calculating the cost. Just follow the money. Most of it goes to mortgage lenders, realtors, government sponsored enterprises and bond traders. Relatively little gets passed on to homeowners.
Easy money increases the risk of a future meltdown: The constant availability of easy mortgage credit misallocates capital, increases market distortions, makes future housing bubbles more likely and increases the likely severity of those bubbles. Easy money drives the homeownership rate higher than it should be. Easy money drives sales prices higher than they should be. Easy money drives realtor, homebuilder and mortgage banker incomes higher than they should be. All of which makes future housing cycles more severe than they should be.
It's about government meddling: The housing advocacy movement likes federal guarantees because the government then has the right to say who gets mortgages and on what terms; to demand that mortgage lenders make sweetheart loans to politically favored borrowers; and to demand that housing lenders pay thinly disguised taxes to fund politically favored housing causes.
Everything above applies with even more force to apartment loans. The housing lobby wants federal guarantees there too, despite the near-total lack of any public-purpose justification, which just goes to show that all the talk about "promoting homeownership" is sleight-of-hand to distract us from the real agenda, which is to obtain unfair subsidies for the housing industry.
Basically, everyone who is inside the housing tent wants federal guarantees for mortgage loans, and for self-serving reasons. Housing professionals get higher incomes. Home prices are higher (in the short run). But in the long run, taxpayers foot a very large bill when the next meltdown occurs. So it's no surprise that the housing lobby is arguing (again) that mortgages should have a federal guarantee. Which would make the rest of us bail out the housing industry, again, after the next housing meltdown.
Charlie S. Wilkins and Thomas W. White are adjunct scholars at the American Enterprise Institute.