The Washington PostDemocracy Dies in Darkness

Opinion In our housing finance system, everyone is in favor of the wrong thing


“We make plans; God laughs,” says a wise Yiddish proverb. And when we make plans to reform the U.S. housing finance system, God laughs hysterically.

Or so one supposes, given the history of efforts to overhaul the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, a.k.a. Fannie Mae and Freddie Mac, since the federal government seized the two giant mortgage enterprises during the nationwide housing crash in September 2008.

The entities’ de facto nationalization, and the ensuing $190 billion bailout, revealed basic design flaws; yet for almost a decade, Congress and the executive branch have been unable to legislate a permanent replacement.

The most recent symptom of this failure is the Trump administration’s blueprint, unveiled last week, which would basically keep Fannie and Freddie in business, with some modifications.

Why the impasse? The problem is the U.S. homebuyer’s attachment to the 30-year, fixed-rate mortgage. Over generations, Americans have been trained — by bankers, developers, real estate agents, affordable housing advocates and politicians — to treat this particular loan instrument as some sort of naturally occurring financial phenomenon, the benefits of which they are entitled to enjoy.

The truth is that the United States is the only major industrial country where such a loan dominates the market, due to the heavy hand of government.

Left to their own devices, lenders are understandably disinclined to let households have their money for three decades, during which the value of the collateral (a house) might or might not increase, the borrower might or might not default, and the bank might miss one or more opportunities to get more interest for that pile of cash.

Those pitfalls, from the bank’s point of view, are known as “credit risk” and “interest rate risk,” and in most of the United States’ peer countries, lender and homebuyer share them, like grown-ups, through 15-year loans or five-year adjustable-rate mortgages — with prepayment penalties to discourage refinancing.

Only in the United States did the government take the credit and interest rate risk, albeit through the extremely complicated, non-transparent means of creating Fannie and Freddie to buy up mortgages, package them into securities and sell them to investors — who paid top dollar because they carried an implicit federal guarantee.

The subsidy is what has enabled financial institutions to offer affordable 30-year loans to the U.S. masses.

Neither Congress nor the president dares question the 30-year, fixed-rate loan. Rather, the price of admission to the reform debate has been a pledge to perpetuate it. Even the current Federal Housing Finance Agency director, Mark Calabria, a trenchant critic of the 30-year, fixed-rate mortgage before his appointment, has had to pay homage.

Calabria and the rest of the Trump team thus find themselves reinventing the wheel in housing finance and calling it reform. The U.S. taxpayer shares the risk of a repeat, some day, of the 2008 housing meltdown.

To be sure, the Trump plan would mitigate those risks somewhat by forcing Fannie and Freddie to raise lending standards and by charging them more money for what would be an explicit, and ostensibly limited, federal backstop, while gradually restoring them to private shareholders.

We shall see how long those measures can hold up against inevitable lobbying, in the name of “affordability” and “homeownership,” for easier credit.

What’s especially irrational about the U.S. attachment to the 30-year, fixed-rate mortgage is that it cannot be shown to have met its public policy goal — increased homeownership rates. In 1965, three years before Fannie Mae took its modern form, 63 percent of U.S. households owned their own homes; the current rate is 64.1 percent.

Meanwhile, the standard mortgage in Canada is a 25-year loan with rates renegotiable every five years; the country’s homeownership rate stood at 67.8 percent in 2016. In Australia, the 2016 homeownership rate was 65 percent; more than 90 percent of home loans are adjustable-rate.

Bill Clinton and George W. Bush during their presidencies used Fannie Mae, Freddie Mac and other agencies to goose homeownership, which peaked at 69 percent in 2004. In hindsight, that short-lived gain came at the cost of an enormous bailout.

Even when Fannie Mae and Freddie Mac were healthy, much of the government subsidy they provided accrued not to homeowners but the builders, developers, real estate agents, bond investors and Fannie-Freddie stockholders who preceded them in the long financial daisy chain. Hedge funds have been angling for a windfall from privatization and might still get one, depending on how quickly the Trump administration allows the two entities to take profits again.

And let’s not forget the environmental consequences of what amounts to massive federal support for suburban sprawl.

American public policy often fails due to a lack of consensus. In the case of our wasteful housing finance system, however, the problem is that everyone is in favor of the wrong thing.

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Read more:

The Post’s View: A temporary fix to our mortgage system

The Post’s View: It’s time for a Fannie-Freddie fix

The Post’s View: Congress needs to come up with a permanent fix for its ‘temporary’ housing-finance takeover

Diego Zuluaga: A tool meant to help minorities buy homes is instead speeding up gentrification in D.C.

Hugh Hewitt: Older Americans face a housing crisis. Here’s what Congress should do about it.