Feds rethink policies that encourage home ownership


Using guarantees and tax breaks, the government pushed homeownership past 69% in 2004. Then it all came crashing down.

Other critics say eliminating or overhauling Fannie and Freddie isn’t enough: The government must reconsider such bedrocks of housing policy as the mortgage interest deduction and the tax exemption of most capital gains from home sales.

They say these misguided or outdated government policies encourage the United States to massively overinvest in housing, shortchanging other parts of the economy. “There’s only so much subsidy to go around at the end of the day,” Katz says.

Fannie (established by Congress in 1938) and Freddie (1970) were private, profit-seeking companies, but they operated with the implicit understanding that taxpayers would bail them out if they ran into trouble. That assumption gave them access to low-cost financing. They made enormous profits, paid their top executives extravagant salaries and accumulated outsize influence in Washington. They used their clout to lobby for bare-minimum levels of capital to cushion against losses.

Just about everyone agrees that Fannie and Freddie, known as government-sponsored enterprises or GSEs, were built around a fatally flawed model — one in which investors and executives pocketed profits and taxpayers absorbed losses. “After reform, the GSEs will not exist in the same form as they did in the past,” Geithner told Congress in March. “Private gains will no longer be subsidized by public losses.”

One example: Freddie and Fannie, with their government backing, allowed the proliferation of 30-year, fixed-rate mortgages — a product that lenders would otherwise shun. Reason: Long-term, fixed-rate loans struggle in any interest rate scenario. If rates rise, banks are squeezed, because their revenue remains fixed even though they have to pay more for deposits and other funding. If rates fall, homeowners refinance. “No rational market participant is going to bear that risk,” Date says.

But what do politicians care about being rational with money… it isn’t their money but rather someone else’s… they get to play Santa Claus and hand it out to secure their seats in Washington and pass the bill on to taxpayers.

“Fannie Mae, Freddie Mac and other government entities guarantee more than 90% of newly originated mortgages. They are practically the only game in town.”

This is because everyone knows rates will go up so why would a lender lock themselves into a losing position.  Only the idiot government politicians would do such a thing.

USA Today

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