Too Much Government in Housing Spells Taxpayer Risk

During a mortgage crisis, temptations abound to create new rules to "fix" the market and prevent future catastrophes. The irony is that previous government "fixes" of the market were the root causes of the current crisis.

Through manipulation of interest rates and deliberate alteration of underwriting standards, government institutions, including the Federal Housing Authority, Fannie Mae and the Federal Reserve, largely caused the subprime crisis and disruption of the credit system.

Since the collapse of the subprime housing market, the FHA and its financing arm, Ginnie Mae, have grown by leaps and bounds as the government funneled mortgage applicants to government-subsidized lending programs. The federal government has been taking on increased amounts of financial risk with the rapid expansion of the FHA over the past year - risk the government may be unable to bear.

Current statistics show the FHA has expanded exponentially since 2006, when it covered only 2% of the market during the height of the lending boom. Today, with much of the private market frozen, the FHA now backs around $560 billion of mortgages, quadruple the amount in 2006, according to federal reports. The primary holder of the increased mortgage risk is the government-sponsored company Ginnie Mae.

This puts the FHA and Ginnie at a seriously increased risk of failure due to the volatile nature of lower-priced mortgage loans.

When the taxpayer guarantees provided through FHA, Ginnie Mae, Fannie Mae and Freddie Mac are taken as a whole, nearly nine of every 10 new mortgages in America now carry a federal taxpayer guarantee. This places the burden of a chaotic housing industry directly on the taxpayers' shoulders.

Instead of allowing the private market to correct itself and fix the root causes of the crisis, the government is assuming the risk of individual buyers at taxpayer expense. The result of the expansion is all risk and no reward for American taxpayers.

Moving much more government tax revenue into an already bloated housing market will only prolong the housing bubble that emerged as a result of previous government mismanagement of interest rates. The U.S. economy has relied excessively on the housing market as an economic engine, with the Federal Reserve designing its policies to sustain the housing boom. For an economy to grow and evolve, investment and capital must move naturally to where they are most efficiently used. The current policy of favoring housing loans prevents that from happening.

A sound recovery will come only through a long-term policy implementing a return to sound market fundamentals. Using taxpayer money to support an ailing system is fiscally and morally irresponsible. The new law's supporters have tried to portray these bailouts as a rescue for homeowners, but they are in fact more harmful than helpful, ignoring the root causes of the crisis.

Matthew Glans ( mglans@heartland.org) is a legislative specialist in financial services for The Heartland Institute, which promotes free-market solutions to economic and social issues.