Housing finance reform: Should there be a government guarantee?

Omaha Homes For Sale/flickr

Row of Houses in Omaha, Nebraska on Jun. 25, 2010

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  • CBO estimated that if current policies are pursued the national #debt will rise from $14.3 trillion to $23 trillion by 2021

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  • Taxpayers will have to bear the burden of the subsidies that the gov't hands out through its support for housing finance

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  • The housing sector can run perfectly well without gov't backing

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Read the full text of this testimony as a PDF

This testimony is in three parts. First, I address a government guarantee for housing finance in the context of its adverse effects on the U.S. debt picture, on U.S. taxpayers, and on the overall health of the U.S. economy. In the second section, I address the arguments that are generally made in support of a government-backed system and show that they are without merit. In the third section, I briefly discuss how a fully private system for housing finance should be structured.

I. Problems Associated with a Government Guarantee of the Housing Finance Market

Effect on U.S. Debt

Although the government's overall debt position is not an issue that is usually part of the debate on housing finance policy, the fiscal position of the United States has deteriorated so seriously in recent years that the question whether to increase the national debt in order to support the U.S. housing market has now become highly germane.

The CBO recently estimated—even after the recent debt extension agreement—that if current policies are pursued the national debt will balloon from $14.3 trillion today to $23 trillion in 2021. Virtually all proposals for U.S. government assistance to the housing finance market assume that it will involve an explicit government guarantee, but even if this guarantee is only implicit—as it was with the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac—it will make no significant difference except in the budget numbers. As my AEI colleague Alex Pollock has pointed out, the off-budget debt of the various government agencies—primarily Fannie Mae and Freddie Mac—currently totals $7.5 trillion, but the bailout of Fannie and Freddie proved beyond question that this debt is every bit a part of the nation's debt as the securities are issued by the Treasury.

So, without any change in policies and without any further increase in the GSEs' debt, the national debt will reach $30 trillion in ten years. With this background, it is hard to believe that there is actually a viable campaign to have the government support the housing market once again. At a time when Congress is having great difficulty trying to reduce the debt by finding places where spending can be cut, it is astonishing that some in the private sector can appear before Congress to ask for yet more debt in support of the housing market, a sector of the economy that could function perfectly well without any government backing.

Accordingly, in considering whether the government should back housing finance, the first consideration this committee should have in mind is whether it would be good policy at this time to add to the U.S. government's financial obligations.

Peter J. Wallison is the Arthur F. Burns Fellow in Financial Policy Studies

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Peter J.
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