Loan Modification

Does Government Support for Home Ownership Make Sense?

By Gina Pogol

Treasury Secretary Hank Paulson said in a Washington Post article that using government (read: taxpayers) to support home ownership (read: The American Dream) has been misguided and needs to change. What brought us down was the combined efforts of Fannie Mae, Freddie Mac, and FHA to make home ownership available to as many as possible. The benefits of a high rate of home ownership have proven to be more anecdotal than quantifiable, and the costs have become all too apparent.

At the root of our economic problems, Mr. Paulson says, is a tax and regulatory structure that makes home ownership so much more desirable than other investments. Government backing in the form of FHA insurance or the implicit guarantees of Fannie and Freddie still touch 90% of all mortgages. So if you are renting and paying taxes, your money is going to subsidize your neighbors who own homes. And with 25% of all folks these days with credit scores down in the untouchable range below 600, that’s a lot of people paying rent whose taxes are supporting someone else’s American Dream.

So, What’s the Fix?

Fannie Mae and Freddie Mac cannot continue in their guises of neither-fish-nor-fowl, that is, neither private corporation with no government mandate, nor government entity with no profit motive. The days of “heads, stockholder win, tails, taxpayers lose” must end. Fannie and Freddie must be moved wholly into the private sector and regulated carefully, no longer having the advantages that allowed them to drive out wholly-private competition.

Will FHA Lending Be Scaled back?

Mr. Paulson is in favor of limiting FHA lending to lower income folks with smaller loans. And he wants to keep the price of the insurance commensurate with the risk being taken on the loans. In other words, take FHA back to where it was only a few years ago, when private lending was as attractive or more attractive to most borrowers and FHA had a relatively small part of the market. Today, any lender willing to take on the kind of risk FHA does would have to pay its investors a lot more to make those loans than FHA currently pays its investors (yep, that’s taxpayers, again). The playing field must be leveled and our infatuation as a society with home ownership must end.

Not Yet

Mr. Paulson recognizes that major change must wait for a more stable time. “The benefits of a reduced subsidy for home ownership are clear, ” he says. “But we cannot move toward this model until the housing market is stabilized and housing prices are likely to rise.”

Full post as published by FHA Mortgage Guide on August 02, 2010 (boomark / email).