NCPA - National Center for Policy Analysis

A Housing Market without Fannie Mae and Freddie Mac

May 3, 2012

Between 2003 and 2006, home prices rose dramatically, but then fell abruptly in 2007 and thereafter.  While economists have put forth a number of factors that lent momentum to these trends, it seems altogether undeniable that the expansion of credit made available by government-sponsored enterprises (GSEs) played a role, says Nahid Kalbasi Anaraki of the Heritage Foundation.

Financial institutions such as the Federal National Mortgage Association (FNMA or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) fueled an excessive expansion of credit in the housing sector that shifted the demand for real estate to the right and caused home prices to overshoot their underlying market equilibriums.

A new analysis conducted by the Heritage Foundation of mortgage interest rates and down payment behavior between 1980 and 2010 shows that the overall impact of these interventions is harmful and at least partially responsible for the recent bubble.  Among their conclusions:

  • The conventional mortgage interest rate has a small negative impact on home prices.
  • A 25-basis-point increase in the conventional mortgage interest rate leads to a 2.25 percent reduction in home prices -- a relatively small impact.
  • A 25-basis-point increase in down payment leads to 1.5 percent lower home prices -- also a small impact.
  • The federal government's policy of subsidizing mortgage interest rates and lowering down payments to raise homeownership has failed due to inelasticity of home prices to mortgage interest rates and down payments.

The study makes clear that the GSEs' role in lowering interest rates does help those who choose to refinance pre-existing mortgages, but it does little to help low-income individuals secure homeownership through lower prices.

In total, market analysts should see that Fannie Mae and Freddie Mac did little to achieve their goals, while simultaneously contributing to those forces responsible for the eventual housing bubble.  The prescription for these GSEs, therefore, can be nothing but absolute liquidation and their removal from market participation.

Source: Nahid Kalbasi Anaraki, "A Housing Market without Fannie Mae and Freddie Mac: Effect on Home Prices," Heritage Foundation, April 23, 2012.

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