NCPA - National Center for Policy Analysis

A New Housing Finance System for the United States

March 20, 2012

Government involvement in the housing-finance industries in the United States has proven disastrous over the past several decades.  Government guarantees have put taxpayers on the line for enormous payouts and specific policies have grossly distorted incentives.  In addition to these losses, few benefits of this involvement have been realized, as most government initiatives prove ineffective, says Peter J. Wallison, the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute.

The difficulties with government involvement in the housing-finance market are far broader than any specific policy -- they are obstacles inherent in any government intervention in the sector.

  • Government agencies have neither the incentives nor the means accurately to price the risks they are taking.
  • Furthermore, for the large subset of government policies that involve insurance programs, political pressure prevents agencies from accumulating reserves during good times in order to float them through the bad times.
  • Finally, government agencies are unable to limit their involvement: policies tailored for individual population subsets inevitably result in additional petitions from those not originally targeted who also desire government assistance and these petitions are usually indulged.

These are obstacles inherent in all government interventions in the market, and they result in a housing-finance market that is bureaucratic, overregulated and heavily laden with bad incentives.

Additionally, empirical evidence shows that these policies, in addition to their significant losses to taxpayers through bailouts and guarantees, have yielded few benefits for the national mortgage market.  Comparison with 15 Western European countries, whose governments are not nearly as involved in their housing markets, demonstrates how ineffective the U.S. government has been.

  • The United States had an owner occupancy rate in 2009 of 67.2 percent, which was equal to the European average and ranked 8th among the 16 countries.
  • American mortgage owners also faced steeper rates than European counterparts, averaging a mortgage rate of 5.18 percent, whereas the European average was 4.96 percent.
  • Aggregately, America also maintains a high outstanding mortgage-to-gross domestic product ratio of 81.4 percent (as of 2009) -- the 6th highest among the 16 countries and much higher than the European average of 63.3 percent.

Source: Peter J. Wallison, "A New Housing Finance System for the United States," American Enterprise Institute, March 2012.

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