Many Americans are aware of Congress’s long history of using Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs), to increase homeownership among low-income and minority Americans at taxpayers’ expense.
Hidden Taxes, Hidden Subsidies
Yet a recent study published by the University of Chicago provides new evidence of how government control of the home mortgage market distorts interest rates throughout the country, giving some homebuyers subsidized financing advantages over others.
In the private housing market, interest rates vary from region to region depending on local economic conditions. Loans in areas with tougher economic climates have higher interest rates to account for the greater risk of default. However, the University of Chicago paper shows that loans backed by Fannie and Freddie charge buyers with the same personal characteristics identical interest rates no matter where in the country they live, even though local economic conditions heavily influence the odds that a new borrower will default on a loan.
The authors estimate that during the 18-month Great Recession from December 2007 to June 2009, the average borrower in a top-performing metro area paid $998 more than they should have for a GSE-backed loan, while the average borrower in the lowest-performing markets paid about $797 less. That’s a substantial hidden tax for some and a large subsidy for others.
Undermining the Housing and Financial Markets
Using Fannie and Freddie, which are still in federal conservatorship, to reallocate credit and to achieve political ends of broader and “affordable” housing goals, particularly in such a non-transparent fashion, ultimately undermines stability in housing and financial markets. This type of market distortion undoubtedly contributed to the housing bubble and financial market collapse.
It is past time for Congress to eliminate federal government support and control of the U.S. housing finance system.
Housing Finance Reform
For a conservative vision of housing finance reform, see a recent paper by Heritage analysts Norbert Michel and John Ligon.