Voters Should Be Hearing About Housing-Finance Reform
Fannie Mae and Freddie Mac are unlikely to figure prominently in any congressional or senatorial race this fall, but maybe they should—at least symbolically. Let me explain.
Fannie and Freddie are the GSEs—the government sponsored enterprises—that helped exacerbate the housing bubble and then helped exacerbate the collapse. They didn’t originate mortgages. But they bought them—to the tune of trillions of dollars— and held some and securitized the rest.
When the housing market collapsed, and along with it the securitized mortgage market, Fannie and Freddie became insolvent and were put into government conservatorships in September 2008, where they remain.
Fannie and Freddie are likely to represent the largest cost to the federal government of any of the rescue actions of 2008 and 2009. As of this summer, the two GSEs had absorbed over $150 billion of federal funds, with the prospects of much more being needed and very little of it ever being paid back.
Fannie and Freddie are symbolic of the excessive resources that the American political system has devoted to housing, through subsidies such as special tax breaks for home ownership and for housing construction, as well as the implicit subsidy that went along with being a GSE.
In this latter case, although Fannie and Freddie were private enterprises that had their shares traded on the New York Stock Exchange, their extensive ties with the federal government convinced their creditors that the government would ride to their rescue if the GSEs ever experienced financial difficulties—which turned out to be a correct prediction in September 2008.
Until then the GSEs appeared to be a politician’s dream: a free lunch. The GSEs allowed qualifying residential mortgages to carry slightly lower interest rates—about one quarter of a percentage point—at no cost to the government! It is no surprise that Fannie and Freddie were exceedingly popular on both sides of the political spectrum on Capitol Hill.
But, alas, here as well as in most other areas, there was no free lunch; we are now paying for a very costly meal indeed. And, more generally, the excessive emphasis on housing has had its consequences.
Careful research in the 1980s estimated that the US housing stock was 30 percent larger than it would otherwise be in the absence of all of the subsidies, and US aggregate income was consequently about 10 percent less than it would otherwise be, because capital was being devoted to less productive uses (housing) rather than more productive uses (plants, equipment, social infrastructure, human capital). Subsequent research has supported these findings. Further, much of the benefits were focused on higher-income households, which is not a sensible direction for social policy.
So, as people enter their voting booths in November, they should be asking hard questions about the directions in which US policy should be going in an era when resources are especially constrained.
Housing policy is clearly a good place for those questions to be asked. And Fannie and Freddie are poster children for the past unwillingness of politicians of all stripes—and the voters who elected them—to ask those hard questions.
It really is time for a change.
Lawrence J. White is Arthur E. Imperatore Professor of Economics at New York University's Stern School of Business. He is a former economist for the President's Council of Economic Advisors and the Justice Department, and a former member of The Federal Home Loan Bank Board, in which capacity he also served as one of the board members of Freddie Mac, 1986-1989. He has a PhD. from Harvard University.