The US Government has long been involved in helping to assure a flow of funds for the US housing market. Support of the Savings & Loans served the purpose until 1989 when deregulation of interest rate controls forced the S&Ls to compete in a real market economy. The result was a bailout that cost taxpayers 150 billion dollars.
Lesson unlearned, the government moved on to the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, as a tool to buy and hold mortgages. Unable to resist an opportunity for tweaking social policy, by 1992 Congress was using Fannie and Freddie for a new mission, affordable housing. The mandate to make it possible for more people to buy a home lead to lowering standards: minimum income required, credit worthiness, and minimum down payment. The sub-prime loan was born. The increased demand also helped to push up home prices and feed the real estate bubble.
By 2008, half of 27 million US mortgages were high-risk loans which had often been made with little down payment by borrowers. As housing prices started to drop, borrowers with little personal financial investment in their properties began to default. The collapse this time took the entire US economy with it, each side adding more fuel to the meltown. The final cost of bailout is estimated at between 220 and 360 BILLION dollars.
This government intervention has at least made it possible for more Americans to own their own home? It turns out that the US ranks #17 among developed countries in home ownership rate. In most European countries, bank mortgage portfolios are supported by covered bonds that investors consider high-quality financial instruments. With banks guaranteeing any potential shortfall, they have a vested interest in making sure borrowers are credit worthy.
The US housing market is huge and banks here cannot supply all necessary mortgage credit. But Fannie Mae and Freddie Mac and their lax standards have not solved the problem. The future is likely to be one with much less taxpayer subsidized support for mortgages. Other viable financial instruments such as those found in the securization market, the backbone of credit card and auto loan markets, will be have to fill in the gap. With more real market financing of mortgages, borrowers will have to be credit-worthy to guarantee that investors buy in. The FHA will and should continue to finance low-income borrowers but reform is needed to make sure this agency does not grow into another Freddie/Fannie type vehicle bloated with risky loans that taxpayers will be asked to bail out a few years from now.
The challenge will be to make sure homeownership remains an option for as many Americans as possible.
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