PATH Act and GSEs Q&A

Questions and Answers:

“Do we need a broad-based government guarantee in the U.S. housing market?”

No.  A government guarantee is not necessary to have a stable housing market.  Removing the broad government guarantee in the U.S. secondary mortgage market would likely result in a more stable housing finance system.

“Does the government guarantee ensure the viability of the housing market?”

No.  The U.S. housing market collapsed in spite of the implied government guarantee to Fannie and Freddie—a guarantee similar to the one behind the Savings and Loan industry that did not prevent the housing crisis in the 1980s.  Furthermore, the implicit guarantee to Fannie and Freddie directly undermined the stability in U.S. financial and housing markets.

Since Fannie Mae became a GSE in 1968, and started buying loans in the conventional market (i.e., loans not insured by the FHA and VA), the homeownership rate was 63.9 percent compared to 65 percent from the most recent data in 2013.  Moreover, despite the costly government-led housing policy, the U.S. lags behind most Western nations in terms of overall homeownership rate.  We are the only developed nation with a housing market dominated by government-sponsored activity.[1]

“Does the government guarantee ensure the availability of the 30-year fixed rate mortgage?”

No.  Removing the guarantee would not mean the demise of the 30-year fixed rate mortgage (FRM) prevalent in the U.S. mortgage finance system, nor does H.R. 2767 call for the end of any mortgage product.  Banks could continue offering long-term fixed rate mortgages.

Such mortgages exist today, and have existed historically, without government involvement of any sort. For instance, there are currently jumbo loans—loans above the GSE loan limits—that are 30-year FRM and may have slightly lower rates than conventional GSE loans.

“Is a government guarantee needed to ensure a wide range of safe, reliable mortgage products for creditworthy consumers?”

No.  The government guarantee is not necessary for private capital to flow to the U.S. secondary mortgage market.  The private label mortgage backed security (MBS) market developed simultaneously with the GSEs’ securities in the 1980’s.  The size of the private label market stood at approximately $600 billion before the housing boom, and is currently just under $1 trillion.

“Would removal of a government guarantee result in higher interest rates for home buyers?”

Housing markets are not static and any change in interest rates would likely be offset by a corresponding move in home prices.  The net result is that homes will likely remain as affordable as they are now without the associated risk of a taxpayer bailout.  Beneath the top line, it is certainly possible that removing the government guarantee for Fannie and Freddie could result in marginally higher interest rates for some potential home buyers (although it is more likely that the Federal Reserve policies will have a far greater impact on the trajectory of interest rates than any policymakers’ housing finance reform).

“The GSEs are making money now, so why should we eliminate them?”

The GSE-dominated housing market was a main cause of the financial crisis and the subsequent bailouts.  Regardless of how much money they are currently sending to the Treasury, the same risk will always be present in a GSE-dominated market.  The GSEs are currently “making money” only because they (exclusively) provide a government guarantee on their securities, and only because they have to remit “profits” to the U.S. Treasury.  Taxpayers remain responsible for the bulk of the GSE’s outstanding MBS (nearly $1 trillion).

“Since the FHA has been making significant changes to address its financial solvency, does it really need to be restructured?”

Some of the pending legislation would separate the Federal Housing Administration (FHA) from the Department of Housing and Urban Development (HUD).  For the first time in the history of the program, the FHA would operate under the regulation of a safety and soundness regulator (the Federal Housing Finance Agency) instead of a political appointee.  This change should, if nothing else, make the FHA’s financial condition more transparent, protect taxpayers and empower responsible FHA-supported homeownership.

Staff Contact: Zack Slingsby, Educational Coordinator (Zachary.Slingsby@heritageforamerica.org)


[1] As of 2009, owner occupancy rates in US were just at the median when compared to 16 W. European countries (even though the US has much lower downpayment requirements); 5th highest housing construction volatility; 4th highest house price volatility; 6th highest average mortgage rate from 1998 to 2010; GDP adjusted, five countries had more housing activity; foreclosure rates 3 to 4 times higher than most distressed European countries (Spain and UK), but mostly because of recourse;

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