Housing Regulator Has Doubts

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Federal Housing Finance Agency director Edward DeMarco testified to the House Financial Services Committee this week on the state of Fannie Mae and Freddie Mac, which are currently under FHFA conservatorship. 

While Fannie and Freddie continue to bleed taxpayers, the question of what to do with the failed housing entities is a hot topic. One of the worst ideas suggested thus far is to have the federal government explicitly guarantee all conventional mortgages.
 
In his testimony, DeMarco cautioned that replacing Fannie and Freddie’s “implicit guarantee with an explicit one does not resolve all the shortcomings and inherent conflicts in that model, and it may produce its own problems.” DeMarco then enumerates three concerns:
 
  • An explicit federal guarantee presumes that the market cannot evaluate and price risk. But can the government do it any better? If the government gets it wrong, taxpayers could be on the hook. 
  • Policymakers would likely manipulate mortgage credit to benefit particular groups or geographic areas. Once again, taxpayers could be on the hook for problems that result from government distortions. 
  • The federal government already favors housing through such policies as the mortgage interest tax deduction. Government backing for most mortgages would add another layer of bias toward homeownership. 
DeMarco’s testimony was carefully worded so as not to tell the committee members what they should do. Rather, it was delivered as “food for thought.” However, committee members should have understood his testimony to be a direct warning. As a Cato essay on housing finance explains, federal manipulation of the housing market has already done enough damage. If policymakers want a healthier housing market, extricating the federal government should be the goal.