5 reasons to get government out of the mortgage businesses


Article Highlights

  • The housing lobby is once again trotting out the usual arguments for all-encompassing federal guarantees.

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  • Housing markets periodically melt down, so there are very large losses that happen infrequently.

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  • The housing lobby wants to keep secret the elephant in the room: their real intent is to capture subsidy

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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.

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About the Author


Charles S.
  • American Enterprise Institute (AEI) adjunct scholar Charles Wilkins is an affordable housing expert. As a principal of the Compass Group LLC, he advises governmental and private clients in rental housing policy, including rental housing finance and project and loan performance. At AEI, his work focuses on multifamily housing policy and finance.

    Earlier, Wilkins worked for the National Housing Partnership. He is the author or coauthor of four books that were published or co-published by the Compass Group LLC: “Managing Occupancy: A Companion Guide to HUD’s Occupancy Handbook” (2004), “Fair Housing: A Guidebook for Owners and Managers of Apartments” (2000), “Shelter From The Storm: Successful Market Conversions of Regulated Housing” (1998), and “Managing Housing Credit Apartments: A Question & Answer Handbook for Property Owners and Managers” (1998).

    Wilkins has a B.A. from the University of North Carolina at Chapel Hill.

  • Phone: 703.217.8394
    Email: cwilkins@compassgroup.net
  • Assistant Info

    Name: Emily Rapp
    Phone: (202) 419-5212
    Email: Emily.Rapp@aei.org


Thomas W.
  • Tom White is an adjunct fellow at the American Enterprise Institute (AEI). An expert in housing policy, White has public service and technical experience in the financing, building, and managing of multifamily and single family housing. At AEI, he continues his work in housing policy, including housing finance and affordable housing.

    Early in his career, White served as a Michigan State legislator (11th District). He went on to work for the Michigan State Housing Agency where he oversaw the development (construction lending) and financing of single-family and multifamily housing. Later, at the US Department of Housing and Urban Development, he was in charge of bond finance and state agency programs for housing policy. White has also worked in senior positions at the National Council of State Housing Agencies, at Bear Stearns Investment Bank, and at Fannie Mae until his retirement in 2001. Since then, he has been a trustee of Center Line Capital, which specializes in multifamily finance and equity investments.

    White has a B.A. in history from Wayne State University. He has also done postgraduate work in sociology.

  • Email: twhite518@gmail.com
  • Assistant Info

    Name: Emily Rapp
    Phone: (202) 419-5212
    Email: Emily.Rapp@aei.org

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