After a housing bubble, do Americans really need subsidized 30-year mortgages?

America, you built this.
America, you built this.
Image: Reuters/Kevin Lamarque
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There’s one important thing to remember about America’s housing-driven economic recovery: The government financed almost all of it.

Now American lawmakers are figuring out just how much it’ll pay for in the future—and whether it should cover the costs of the pricey 30-year home loans most Americans view as their birthright.

Today, the bulk of new mortgage loans are guaranteed by the US government. In the first part of 2012, it was nine in ten mortgages, up from three in ten in 2006.  Fannie Mae and Freddie Mac, “government sponsored-entities” (GSEs), buy mortgages and bundle them into securities with a promise to cover the costs if borrowers stop paying the underlying loans—that’s the big subsidy. These securities are sold on the open market, providing a flow of financing to the mortgage lenders (the banks). The GSEs have functioned with implicit financial backing from the government since Fannie Mae—originally created in 1938 to help the US housing market out of the Great Depression—was privatized to pay for the Vietnam war.

The implicit backing quickly became explicit during the 2008 financial crisis, when many homeowners stopped making loan payments. The GSEs, on the hook for all those payments, were nationalized when it became clear they would go bankrupt otherwise. While that was hugely expensive, to the tune of $187 billion, today the lending business is brisk as home prices rise. Fannie and Freddie have paid some $132 billion back and look set to make another $60 billion this year.

Lucking into a hugely profitable securitization operation is pretty awesome, from the point of view of the government, but it’s not a good long-term plan. Reform efforts are now gathering steam, and yesterday (Aug. 6) president Barack Obama spoke up in favor of a plan that looks like the old system.

To be sure, the White House would get rid of multiple GSEs in favor of a single mortgage insurer, and it would demand far more money up-front and risk-sharing from private lenders. But the framework still maintains the goal of supporting America’s cherished 30-year fixed-rate mortgage—a global rarity, whose supporters fear it will be extinguished without government backing, especially if interest rates start to rise. Critics of that approach note that so-called jumbo mortgages—those that are too large for a federal guarantee—still exist in 30-year fixed-rate varieties, and are just slightly more expensive.

Most other advanced economies rely on multiple refinancings of variable-rate home loans. They maintain high homeownership rates with lower public costs, while the US homeownership rate—and the debt that goes along with it—is probably too high compared to its historical experience. US subsidies, whether they come in the form of a guaranteed loan or the tax deduction for mortgage interest, largely favor the already-wealthy; for the poorer, the best investment for their hard-earned dollar might not be a home.

House Republicans are in favor of abolishing the whole government apparatus and letting the markets do their thing. However, the likely initial chaos unnerves both homeowner advocates and a financial industry that rather enjoys the government guarantee. They tend to favor ideas articulated by Obama and Senate centrists that keep a strong government role in the market.

Meanwhile, affordable rental housing is still hard to come by—and while Obama announced some measures to get at that problem, he rather undermined them by continuing to depict homeownership as an inevitable goal and renting as merely a step on the road to it.