In the event the government were to get out of housing, it would seriously impact everything from tax benefits to Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), making the prices of houses to fall to an unsubsidized market rate, notes Rafferty Capital Markets LLC’s Vice President Richard X. Bove.
In a report dated May 16, 2014 titled: “The Government Should Get Out of Housing” Bove highlights some facts and probable results of the government getting out of housing.
Government’s thrust towards social policies
Chronicling actions initiated by several governments since 1890, Bove points out Grover Cleveland said in 1890 that it isn’t the job of government to help the people, while it’s the job of the people to help the government. However, government took a decisive turn in the 1930s to help the people through a new system of finance which changed housing finance forever.
Bove notes the government’s support to housing sector was reinforced in the 1960s again as private housing finance was ripped apart and made even more ‘consumer friendly’. The government’s stand continued through 1990s when the government decided to use its new financial structure to implement various social and economic policies.
Richard Bove points out that due to the measures initiated by the government over a long period, housing is the most subsidized business in the U.S. today, with Singapore as the country that has more accommodative housing policies.
Fannie Mae, Freddie Mac’s borrowing cost: Plethora of subsidies
Bove highlights several areas where the government offers subsidies to the housing sector. For instance, FDIC insurance lowers the cost of borrowing by banks, which is passed on to the home buyers through lower mortgage rates. Similarly Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) also pass on their borrowing cost advantage.
He also notes that the tax deductibility of mortgage interest is a rare subsidy payment in the U.S. which no other country in the world offers. Moreover, he highlights the country is wedded to long-term, self-amortizing, fixed-rate mortgages as well as offering direct subsidies to housing payments under programs like Section 8.
Fannie Mae, Freddie Mac helped to keep liquidity in the industry alive
Furthermore, during bad times Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) (now the Federal Reserve) step in to buy mortgages to keep liquidity in the industry alive. The government also stops foreclosures where it can and forces banks to offer forbearance on both principal and interest through programs such as HARP.
Bove concludes that all the above measures have helped keep housing prices at artificially high levels, supplemented by below market interest rates.
Dick Bove says it isn’t likely the government will really get out of housing, as such an action would accentuate the fall in home prices, thereby wiping out much of the wealth of the average American household.