Fannie-Freddie 2.0: Government Housing Polices Shouldn’t Get a Free Pass

Norbert Michel / John Ligon /

Secretary of Housing and Urban Development (HUD) Shaun Donovan lamented statistics from a Pew report showing Hispanics lost 66 percent of their net worth between 2005 and 2009. He went on to say:

Think about all the home equity, all the savings and all the retirement funds and other assets that were wiped away in the four years before President Obama took office.

Oddly, he didn’t mention anything about the Community Development Act of 1992, which bestowed affordable housing quotas on the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. Initially, the law required the GSEs to make sure 30 percent of all the mortgages they purchased were from people at or below the median income level in their communities.

But HUD also had the authority to raise those quotas, which is exactly what it did during the Clinton and George W. Bush Administrations. The figure was up to 55 percent in 2007. Perhaps the Pew report provides evidence that these policies didn’t work? Or, possibly, these statistics show that many other government policies—all of which induced low-income families to take out long-term low-equity mortgages—may not have been such a good idea?

Critics of GSE reform typically avoid this question or cite proof that the GSEs only came close to their quotas, neither of which addresses whether the policies may have been counterproductive. These same critics also bemoan how difficult it remains for families to get mortgages some five years after the financial crisis. Donovan, for instance noted:

The second step is to ensure that when families are ready to buy, the housing finance system provides them with the opportunity to do so. Unfortunately, the sad truth is that too many Americans are not getting that chance.

To whatever extent people can’t get mortgages, government policies are at least partly responsible. For the past few years, the U.S. government has nearly taken over the mortgage market.

Fannie and Freddie have been explicitly backed by the federal government since 2008, and Donovan’s own department controls Federal Housing Administration loans and Ginnie Mae’s mortgage-backed securities. Between the GSEs and these HUD agencies, the federal government was responsible for almost 100 percent of new mortgages starting in 2009.

And, of course, there’s Dodd–Frank’s gift to the mortgage world: the Consumer Financial Protection Bureau, whose mission is to “make markets for consumer financial products and services work for Americans.”

If anyone wants to try to stop Congress from shutting down the GSEs, that’s certainly their prerogative. But critics should be honest about what’s going on in the mortgage markets.

The government has been getting more involved in these markets for decades, and it’s been encouraging people—especially those with low wealth—to borrow large sums of money. Owning a mortgage is not the same as owning a home. Perhaps it’s time to try the opposite approach and get the government out of the mortgage market.