By Robert Freedman, Senior Editor, REALTOR® Magazine
A group of academics writing in a New York Times opinion piece yesterday, “White Picket Fence? Not So Fast” (Aug. 17, 2011), call for a phasing out of Fannie Mae and Freddie Mac and ending the government support of home mortgages that flow through them. To their credit, Viral Acharya, Matthew Richardson, Stijn Van Nieuwerburgh, and Lawrence White say the phase-out should be gradual to “minimize the system-wide shock” that would follow if the secondary mortgage market were closed down overnight.
But the writers use figures and make logical inferences that cry out for more scrutiny.
First, they say the mortgage interest deduction costs the government more than $100 billion a year, and they cite the Congressional Joint Committee on Taxation saying MID costs $700 billion over five years. But as economists and academics will acknowledge, determining how much MID costs the government is as much art as science, because the number you come up with depends on the numbers you put into the calculation. And what those numbers are aren’t widely agreed upon.
John Weicher, FHA commissioner under President George W. Bush and the assistant secretary of policy development and research under the first President Bush, says MID costs are closer to $20 billion a year, and he’s not alone in saying that. Other academics put the number in that range. The reason? They use a calculation that factors in the changes of behavior among households if MID is curtailed or eliminated. The idea goes something like this: as MID shrinks, households put their money into other tax-saving assets.
Who’s right? No one knows, but what’s clear is that it’s misleading to cite “more than $100 billion a year” as fact, because that number is based on a calculation that is itself based on assumptions.
Second, like so many critics of the federal government’s historic support for home ownership, they tie the lower interest rates made available to mortgage borrowers through Fannie and Freddie as a cause of the housing price bubble.
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To be sure, Fannie and Freddie toward the end of the bubble invested in risky loans, ultimately costing the federal government billions in bailouts, although some of that bailout has been paid back and more will be paid back in the next few years, the U.S. Treasury has said.
Make no mistake, NAR supports replacing Fannie and Freddie with a government-chartered entity free of profit-motivated stockholders.
But it’s a questionable leap of logic to say Fannie and Freddie are at the root of the housing bubble and, by extension, the mortgage crisis. The secondary mortgage market companies have been key to market stability for generations of homebuyers. Their core business has and continues to be the providing of safe, 30-year fixed-rate, fully amortizing mortgage financing.
The “over-consumption of housing” that the writers talk about, and the housing bubble that followed, is the product of private lenders offering non-government-backed subprime loans to borrowers based on risky underwriting practices. Households buying homes using stated-income or low-doc loans, balloon loans, negative amortizing loans, and other exotic financing is widely recognized as the root cause of the bubble and mortgage crisis.
These loans are now largely gone from the market and the Wall Street reform act Congress passed last year is intended to help ensure those loans don’t come back.
With the loans gone, the main dragon of the housing crisis has been slayed. But the writers never even mention poorly underwritten subprime loans, so at a minimum they’re guilty of omission. Rather, they say government backing of the secondary mortgage market has to be slayed. Now they’re guilty of commission, because that’s like cutting off a town’s supply of clean water because private-sector engineers botched a dam project that caused the town to flood.
Well, Congress has corrected the dam project. Now’s the time to let the water flow.