Are Fannie and Freddie ever going away?
Almost certainly not.
Why not? For one thing, the law already requires that the government-sponsored enterprises be taken out of conservatorship and put into receivership, as Mark Calabria points out, because they have reached the point of negative equity. If the government is willing to ignore its own laws on the GSEs right now, what reason is there to believe it will take painful steps tomorrow? The issue of conservatorship vs. receivership is sort of like hospital vs. hospice: Enterprises in conservatorship are thought to have a possibility of surviving, whereas those in receivership are generally in the process of being dismantled and laid to rest. Which is precisely where Fannie and Freddie belong.
#ad#The Obama administration simply is not serious about winding down the GSEs any time soon. President Obama’s new budget assumes that the government will be collecting billions of dollars in payments from Fannie and Freddie a decade hence, suggesting that whatever purported plans there are to wind down the GSEs are scheduled to take place at some distant remove in the misty future. As Mr. Calabria puts it: “For Fannie Mae and Freddie Mac to be paying dividends in 2021 requires that they still be around.” To paraphrase the great Burkean philosopher Bluto: Fannie and Freddie have a long tradition of existence, and it is unlikely to be disrupted.
That is bad news — and for more reasons than might immediately be obvious. The unique awfulness of Fannie and Freddie, which together formed a fraud-abetting payola apparatus for well-connected politicians and acted as a prime inflator of the housing bubble, is well documented. But as long as the federal government continues to intervene in the housing markets — as long as the federal government plans to conduct any sort of robust housing policy — it is going to need something like Fannie and Freddie to do its dirty work. Maybe that will be the GSEs themselves, living on in administrative immortality. Maybe it will be the Federal Housing Finance Agency, which currently acts as the GSEs’ conservator. Maybe it will be private banks commandeered through regulation, as they were commandeered for political purposes under the Community Reinvestment Act and similar pieces of legislation. It matters less what the instrument of policy is than what the policy itself is. (For a longer discussion of this brand of socialism via regulatory proxy, read the book.)
Our federal housing policy is doomed to repeat the mistakes of the past because there is a deep contradiction at the center of it. The irreconcilable difference is that the government wants housing to be: A. affordable, and B. an investment that provides real returns. You cannot have both.
If housing is to be an investment that provides real returns, then the price of housing must, in aggregate, rise more quickly than the rate of inflation. If housing prices rise only at the rate of inflation or less, then there are no returns to owning housing; you’d be better off putting your savings in CDs or a simple savings account. That’s because, for a lot of people, a house is not a very good investment. Yes, you avoid paying rent if you own, but you also acquire permanent tax, insurance, and upkeep obligations, along with value risk, etc. You also forgo the returns you’d get from investing the money; in many cases, this will represent a net loss, even accounting for saved rent.
Let’s do some always-suspect English-major math: For example, if you buy a modest $400,000 house on Long Island, you pay in excess of $8,100 a year in taxes. If you own that house for 30 years and hold a 30-year mortgage at 5 percent, that’s more than $600,000 in interest payments, insurance, and taxes. Which is to say, you need your $400,000 house to appreciate to $1 million just to nominally break even, not counting the opportunity cost of investing the money elsewhere. On the other hand, stashing away that roughly $30,000 a year in housing expenses in an investment earning a modest 6 percent gives you $2.5 million over the same 30-year timeline — and you don’t have all of your savings in a single asset.
If housing is going to be an investment that yields real returns after inflation, then that $2.5 million, minus rental expenses, is the number to beat. Which is to say, if housing is going to be a real investment, it has to get really expensive — increasingly out of reach every year and every generation.
#ad#Which makes the Obama administration’s recent report on Fannie and Freddie that much more despair-inducing. It begins: “Our plan champions the belief that Americans should have choices in housing that make sense for them and for their families. This means rental options near good schools and good jobs. It means access to credit for those Americans who want to own their own home, which has helped millions of middle class families build wealth and achieve the American Dream. And it means a helping hand for lower-income Americans, who are burdened by the strain of high housing costs.”
Only politicians can muster that level of reality-denying stupidity. We can, I think, discount the business about good rental options near jobs and schools, inasmuch as the federal government is not going to be plopping apartment buildings down in strategic locations across the fruited plains. (Please, God, let me be right about that!) But it is, by its own admission, going to continue to be in the business of supplying and encouraging credit in the mortgage market. And every economic and political incentive in the world is lined up to encourage Uncle Stupid to do so in such a way as to inflate housing prices in order to provide real economic returns to homeowners. Homeowners vote. They stick around in one place, have kids in school, and generally stir up trouble if they are unhappy. And their strongest economic desire, beyond winning the Powerball, is to see the value of their homes rise, a lot, every year. Those bubble-inflating government policies did not happen by accident for 80 years. It was bad policy, not bad luck.
And that need for ever-higher house prices leaves government with two options for the poor, and for the middle classes that will inevitably be squeezed out of the market. One is to say: Tough noogies, suckers, you should have gotten into the market when you were six years old. That outcome is implausible. The other is — and see if this sounds familiar to you — to lower lending standards, ensure that particular political constituencies have special access to housing credit, encourage ever-larger mortgage loans to accommodate rising prices, and subsidize borrowing costs in order to perpetuate the illusion of affordability, it being lexically true that you cannot have both real returns on housing investments and stable real prices. Which is to say: Government programs that treat housing as a return-yielding investment all but guarantee both a housing-price bubble and the erosion of lending standards.
Here’s a better housing-market reform agenda: Any mortgage touched by Uncle or his proxies requires a 20 percent down payment. Fannie and Freddie are forced to raise their fees by a few basis points every quarter until they price themselves out of the market, at which point we get aggressive about selling off their portfolios, firing their staffs, and locking the doors. We get rid of the mortgage-interest deduction, which encourages ever-larger mortgages with ever-greater interest components. And then buyers, sellers, and bankers decide what makes sense for each of them on a case-by-case basis, with each party bearing his own costs for any miscalculation.
— Kevin D. Williamson is a deputy managing editor of National Review and the author of the newly published The Politically Incorrect Guide to Socialism.