Reforms targeting Fannie Mae and Freddie Mac were not included in the Dodd-Frank financial regulatory act signed into law by President Obama last month. To many observers, this was a glaring omission given the fact that the two government sponsored entities have required massive injections of government funds currently totaling $145 billion and projected to rise much further. As The Economist described last week, government intervention in the U.S. mortgage market dominates home financing in a manner far exceeding typical government housing support in other developed countries.
As we have pointed out in the past, home ownership is not an inherently better choice for millions of Americans who require flexibility in their living arrangements. The fact that so many Americans are “underwater” and owe far more on their mortgages than the homes are worth has dramatically reduced labor mobility as the economy emerges from recession. A recent article in the Washington Post illustrates how mobility, once a major advantage for the United States economy, has been drastically curtailed by the housing crash.
Too many Americans purchased housing using aggressive low down payment mortgages with teaser rates that even two income households struggled to afford during the boom years. The predictable disasters have now been well documented, but apparently the government still clings to the illusion that home ownership is worth pursuing for the marginal borrower. Freddie Mac is continuing to advertise down payment assistance for “responsible borrowers” who nevertheless lack funds for conventional down payments and closing costs. Through a bewilderingly array of grants, second mortgages, tax credits, and other programs, Freddie Mac is encouraging marginal borrowers to purchase homes that they cannot clearly afford.
At a time when home prices could very well decline further, it seems irresponsible for a government controlled agency to promote home ownership for anyone who cannot come up with a traditional down payment. However, now that the $8,000 tax credit for first time homebuyers has expired, it appears that government is doing what it can to continue propping up activity in the sector rather than allowing market prices to fall to a natural equilibrium level. This will only prolong the pain in housing in general and expose more Americans who probably should be renting to the loss of employment mobility and potential for losses that low down payment mortgages create.
Disclosure: The author owns shares in companies exposed in various ways to residential and commercial real estate activity.