November 8, 2010
The government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac were significant contributors to the build-up of the housing bubble. Yet, virtually no substantive action has been taken to reform them. This delay is distorting the market and preventing a real recovery in housing. The GSEs must be reformed as soon as possible, as a part of a sweeping overhaul of the housing finance system, says Anthony Randazzo, director of economic research at the Reason Foundation.
How Should We Organize the Future System?
- The future housing finance system should be free of government distortions in the market.
- Fannie Mae and Freddie Mac should be eliminated, and all mortgage distortions and fiscal policies favoring homeownership removed along with them.
- A preferable housing finance system would focus on protecting consumers by prosecuting fraud, providing the necessary legal approval for creative methods of mortgage lending and changing the tax code to favor savings (rather than consumption) and investment, letting the market allocate capital to housing as is appropriate.
How Should Consumers Be Protected?
- A reformed housing finance regulatory structure should result in a market that aligns business and consumer interests more acutely, instead of restricting certain business practices and products ad hoc.
- This alignment would best come with a combination of changes including promoting transparency, forcefully prosecuting fraud and creating incentives for consumers to better educate themselves about their mortgage purchases.
A reformed housing finance regulatory structure should be used to align business and consumer interests more acutely, prevent fraud and ensure the market is a just field for competition, says Randazzo.
Source: Anthony Randazzo, "Rethinking Homeownership," Reason Foundation, October, 2010.
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