Tag Archives: housing

What if Fannie Mae and Freddie Mac Were Eliminated?

By Mike Brownfield

For the past several years, it’s not been an uncommon sight in Anytown, USA, to drive down the street and see home after home for sale after going through foreclosure. They are the still-lingering hangover from the housing crash that began in 2007. Though the true cause of what burst America’s housing bubble is still debated, two of the culprits — housing finance giants Fannie Mae and Freddie Mac — are still going strong even though both essentially failed in 2008 and are under government control. Economists and politicians alike are now pondering whether we need Fannie Mae and Freddie Mac at all and what would happen if they were eliminated altogether.

For several years prior to 2007, home prices went through the roof, but then they crashed through the basement. Since then, more than 2.3 million homeowners have faced foreclosure — an 81 percent increase over 2007. This all, of course, contributed to the Great Recession we’re still rebuilding from today. “Easy credit” is pointed to as the corrosive acid that ate away at the housing market’s foundation, and federal government-sponsored mortgage finance giants — the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) — were there to supply it and help other lenders to do so.

Consistent with policies dating back to the Carter and Clinton Administrations, Fannie Mae and Freddie Mac made it easier for low and moderate income Americans to obtain mortgages and purchase homes. In a new paper from The Heritage Foundation, A Housing Market Without Fannie Mae and Freddie Mac: Effect on Home Prices, Nahid Anaraki reports that this “fueled an excessive expansion of credit in the housing sector, shifted the demand for real estate to the right, and caused home prices to overshoot their underlying market equilibriums.” In other words, Fannie Mae and Freddie Mac’s intervention in the housing market helped to fuel the boom-to-bust housing bubble by subsidizing interest rates and enabling reduced down payment requirements on single-family homes, thus unnaturally boosting demand and causing prices to go up.

The trouble with all this, Heritage reports, is that though Fannie Mae and Freddie Mac have made it easier for a family to buy a home, in the long run their actions have a detrimental effect on the economy, as America has witnessed.

So what would happen if Fannie Mae and Freddie Mac were phased out? Would the absence of their ability to offer lower interest loans and smaller down payments impact the cost of homes in America? Anaraki’s analysis shows that it would not. In fact, interest rates and changes in down payment requirements have little influence on housing prices. Instead, fundamentals–such as household assets, personal income, the S&P Index, and the effective tax rate–play substantial roles in shaping home prices. As such, she advises, it’s time for Washington to get out of the business altogether:

The federal government should avoid offering any subsidy in the form of lower interest rates or lower down payments because it adversely affects both the housing market and the economy over the long term. Although such a policy may boost the demand side in the short term, it risks inflating another housing bubble in the medium or long term.

Eliminating Fannie Mae and Freddie Mac, in fact, will help more Americans afford homeownership. Since these institutions increase demand — thereby increasing home prices — it becomes increasingly difficult for lower-income Americans to afford to purchase homes without subsidized interest rates. If Fannie Mae and Freddie Mac are eliminated, interest rates may slightly go up initially, but Anaraki finds that “higher interest rates will lead to lower median home prices, which in turn will increase the ability of low-income groups to purchase a house.” What’s more, competition among housing lenders would increase, leading to lower interest rates in the medium to long term.

Owning your own home is the American Dream, but suffering a foreclosure and winding up on the streets is the American Nightmare. In pursuit of encouraging the former, the federal government helped produce the latter. Government intervention by way of Fannie Mae and Freddie Mac may have given more Americans the keys to their own homes, but they bought homes they could not afford and in a marketplace that could not be sustained. As Heritage showed in an earlier paper, Fannie Mae and Freddie Mac can be phased out without disrupting the housing recovery. A better way forward is to phase out Fannie Mae and Freddie Mac and let the home market find a healthy and sustainable equilibrium.

Mike Brownfield is Assistant Director of Strategic Communications at The Heritage Foundation. He serves as editor of The Foundry, Heritage’s public policy news blog, as well as the “Morning Bell,” one of Washington’s most widely read and influential e-newsletters. This article was originally published in the “Morning Bell” newsletter on April 20, 2012.

New Housing Up In First Quarter of 2010

The number of new housing starts this quarter increased by 1100 percent. That is a fantastic rate, but let’s not let our exuberance blur reality. During the first quarter of 2009, the total number of new housing developments was a dismal one (1). The excitement is all about the whooping 11 permits issued for new housing.

Eleven new housing starts is a good sign.

Let’s hope the trend continues until the new starts outpace the many more residents who have left Xenia. If that happens, city officials will have a real cause for exuberance–more tax revenue and more fee-based income for the enterprise. I’m sure union employees will quit sweating about the threat to their scheduled pay raises.

A look at foreclosures in Greene County and beyond

The bubble bursting housing market set off a rapid decline resulting in our current economic depression. Bursting of the housing market bubble was exacerbated by sharp rises of oil, food, and everything else. The fix envisioned by bureaucrats at all levels is more government intervention and monetary policies resembling New Deal socialism. The ownership of capital markets is the end of economic freedom.

The problem with our government’s corporate banking and business bailouts relates to a general rule of thumb that goes something like this: Government programs tend to last nearly forever. Historically, the promise of a temporary alleviation is most a government ploy to increase power. Welfare was supposed to be a temporary solution to economic crisis before and after WWII. Welfare statism is the norm on both sides of the Atlantic. Federal tax reimbursements to local communities with federal facilities were to compensate local schools, thus making taxation fair and equal. That an excuse for Congress to initiate the Elementary and Secondary Education Act. ESEA and its newest version NCLB was supposed to help the poor obtain a quality education. The old song and dance is still sung by bureaucrats, but ESEA has never just helped the poor or poor school districts. ESEA has always benefit non-poor. The same is the case with State Children Health Insurance Program. These are programs like all other socialist program to rob American of their freedom supposedly with their consent.

Once government gets the control over money, markets, jobs, and the rest of our lives it will not like end without the same struggles that George Washington, Abraham Lincoln, Polish, or the many other peoples across the globe. The consolation is that our written national compact still gives Americans a peaceful means to right wrongs of government.

Anyway, foreclosures (and property ownership) serves as an indicator of the state of American economic independence. According to reports by RealtyTrac, foreclosures in the U.S. rose 80% in 2008. Foreclosures in Ohio soared 26 percent. Of 113,570 filing in Ohio, the Miami Valley accounted for only about 14% or 16,318. It seems property ownership that is supposedly the realization of the American dream is more illusion than reality. The reality is no one owns any property, at least for 20-30 years, except the federal money market.

The good news is foreclosures in Greene County were relatively low by comparison to the rest of Ohio. Only 940 foreclosures were recorded in 2008, which is less than 1% of all Ohio filings and only 5.8% of all foreclosures in the Miami Valley. Greene County is thus blessed compared to other surrounding countries.

Greene County residents also adhered more to principles of our founding during the past election than many other regions. Could there be a correlation?