Fannie Mae, Freddie Mac: 30-Year Fixed Rate Mortgages A Sticky Wicket

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When the Crapo-Johnson proposal for replacing Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) with a new federal agency was released, the Senators made it clear that supporting access to fixed-rate, 30-year loans was one of their top priorities. It wasn’t much of a surprise, then, that the importance of affordable long-term loans is often taken for granted when debating government’s role in the mortgage market, and full privatization seems unlikely because no politician wants to come out against 30-year loans.

But the societal benefit of increasing home ownership may not outweigh the impact that these market interventions have on the rest of the economy.

Nothing should be sacred: Brannon

“Stripping away the façade of private banks and mortgage brokers who originate the loans, the U.S. mortgage market works almost entirely because the government transfers risk to the taxpayer in order to let banks market a product that no sane financier would ever sell in the free market,” wrote Ike Brannon and Eli Lehrer for The Weekly Standard a few years ago.

At the time, Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) had yet to return to profitability and sentiment was decidedly against the government sponsored enterprises (GSE), so there was a bit more room for debate. But Brannon, a senior fellow at the George W. Bush Institute and president of Capital Policy Analytics, still thinks that we should reexamine our housing policies.

“Nothing should be sacred about this,” said Brannan, after taking part in a forum on Fannie Mae and Freddie Mac reform at the Bipartisan Policy Center. He argues that US policies supporting the 30-year mortgage have cost the country trillions of dollars in growth over the last few decades.

It would be hard to come up with exact figures, but in a back-of-the-envelope calculation Brannon explains that the home mortgage interest deduction (which he has also argued against in the past) and other measures that encourage people to buy a house cost the government more than $100 billion per year. If we assume that these subsidies have driven a comparable amount of additional spending in the housing market by encouraging people to buy more expensive homes, second homes, or tipping the scale between renting and owning for first-time buyers, that’s a couple trillion redirected to the US housing market.

“Why do we do this? It’s almost a historical thing – everyone knows these policies make no sense,” says Brannon.

Fannie Mae, Freddie Mac: Federal government will still be on the hook

Aside from putting so much of the nation’s wealth into housing, when it would otherwise be driving growth in other sectors, Brannon isn’t convinced that any government involvement in the mortgage market can escape the fundamental problems that faced Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC).

Even though the Crapo-Johnson proposal provides a few layers of protection for taxpayers (first-loss provisions for the participating companies; reinsurance paid bought with fees collected from mortgage originators), he expects that the Federal government will still be on the hook if we have another crisis like 2008, bailing out the mortgage market among other parts of the economy.

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