The Washington Post has an article detailing the ups and downs of the Obama Administration’s Home Affordable Modification Program (HAMP). Heritage previously pointed out several flaws with HAMP, and it’s no surprise that nearly 30 percent of those who qualified for the program have re-defaulted on their mortgages.
The Post notes that HAMP was based on the assumption that the economy would recover quickly and points out that a recovery is needed to undo “the damage wrought by plunging home prices and high unemployment.” But this statement misses the point that home prices wouldn’t have been able to plunge so far had they not been inflated in the first place.
Research shows that home prices were more than 80 percent above their long-term trend just prior to the crash, and there’s no doubt that the massive expansion of Fannie Mae and Freddie Mac helped fuel those price increases. Any system that provides government guarantees against losses on financial products is bound to grow, and the government-sponsored enterprise system grew to a level that was unsustainable.
The only way national policies can prevent the housing market from crashing is if they don’t inflate home prices in the first place. Permanently shutting down Fannie and Freddie, and getting government guarantees out of the housing markets, would be a great first step toward achieving this goal.