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The Issue

The federal government has actively distorted housing markets for decades, particularly through the operations of Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA). Proponents justified these government guarantees and outright subsidies as a way to increase home ownership, claiming that the private sector cannot provide a reliable source of financing.

These efforts to support the housing market have failed. Despite the large federal subsidies, the homeownership rate has not changed much over the past 40 or so years. At the same time, the total burden of mortgage debt has increased dramatically. Although they were not the sole cause of the economic meltdown of 2008, these policies helped to inflate the housing bubble that burst that year, leaving homeowners underwater and soaking U.S. taxpayers. Congress should curtail its harmful interference in this market and let private institutions take the leading role in housing finance.


Close Fannie Mae and Freddie Mac. Congress should close down Fannie Mae and Freddie Mac in the next five years by repealing the firms’ federal charters. Both entities distort the market by issuing mortgage-backed securities with subsidized government guarantees for investors. Such guarantees, if necessary, should be priced and issued by the private sector. Congress should also take steps to ensure that a new government-sponsored agency does not simply replace the companies. During the process of shutting down Fannie and Freddie, Congress should liquidate their loan and mortgage-backed security (MBS) portfolio as quickly as the market allows; prevent further purchases of MBS; and increase the fee Fannie and Freddie charge for guaranteeing securities (g-fee) and reduce and/or freeze conforming loan limits. (If loan limits are lowered, they should not be decreased as aggressively as g-fees are raised.)

Reduce the Role of the Federal Housing Administration. The FHA has deviated from its mission of providing support to homebuyers with sound underwriting standards. The FHA should eliminate its current practice of supporting homeownership among high-income individuals and setting lending standards that undermine sustainable homeownership for creditworthy low-income and moderate-income and first-time homebuyers. Overall, the FHA has had minimal long-term impact on increasing homeownership in the U.S. Congress should act to decrease taxpayers’ exposure to the loans insured by the FHA. Lawmakers should reduce the FHA’s share of the mortgage market by lowering its maximum loan limits and establishing proper incentives with lenders. These reforms will allow Congress to eventually eliminate the FHA’s role in providing taxpayer-backed guarantees in the mortgage market.

Eliminate Regulations and Limit the Consumer Financial Protection Bureau (CFPB). Congress should eliminate regulations that make it more difficult for banks to lend to people they deem to be good credit risks, and they should reduce regulations that make it more difficult for people to develop new mortgage products that serve the needs of customers. Dodd–Frank mortgage regulations should be repealed, especially those promulgated by the CFPB, such as the “Ability to Repay” requirement. Congress should bar the CFPB (and other agencies engaged in regulating housing finance) from utilizing “Disparate Impact” analysis for regulatory supervision or enforcement actions. Disparate impact is the race-based measurement of outcomes that, absent discriminatory intent, condemns the firm to penalty. For instance, a bank would be judged on whether its pool of borrowers is sufficiently “diverse,” regardless of whether its policies are discriminatory. Additionally, secondary mortgage market reforms should not provide regulatory relief as a reward for using one particular securitization company versus another.

At the very least, lawmakers should change the CFPB’s current automatic funding mechanism (currently set by law as a fixed percentage of the Federal Reserve’s operating budget) and bring it under the appropriations process. Further, the CFPB’s powers should be limited and explicitly defined. These changes would provide incentives for more private capital flows to the housing markets.

Fund Low-Income Housing Programs in a Transparent Manner. Any programs to foster low-income housing should be funded in a transparent manner, using annually appropriated funds. In general, federal housing assistance programs should be decentralized, and reforms of these programs should be linked to state and/or regional land-use and planning deregulation. The U.S. does not have a national housing market as much as it has local and regional housing markets that are heavily affected by regulations of their respective localities. Areas in the U.S. with more restrictive land-use regulations, for example, tend to have significantly higher land (and home) costs.

Facts and Figures

  • Currently, taxpayers are responsible for payments on more than $4 trillion in Fannie Mae and Freddie Mac’s mortgages and mortgage-backed securities.
  • In 1968, the U.S. homeownership rate stood at 63.9 percent. The most recent data for 2015 show a homeownership rate of 63.4 percent, 5 percentage points below the artificially high rate before the 2008 crash. Aside from 1998 to 2008, the rate has fluctuated between 62 percent and 65 percent.
  • Mortgage debt as a percent of U.S. GDP has increased from 30 percent in 1968 to 75 percent in 2015.
  • The annual amounts now devoted to federal support of housing are more than $200 billion for homeownership and $60 billion for renting.
  • Federal spending on means-tested programs supporting housing is about $40 billion; the number of people who receive these benefits is about 5 million, and the average spending per participant on these benefits is about $8,000.
  • Federal tax expenditures for rental housing total over $12 billion. The low-income housing tax credit (LIHTC) program and accelerated depreciation are the two largest categories, with each one costing between $5 billion and $6 billion annually.

Selected Additional Resources

Wendell Cox and Ronald D. Utt, “Don’t Regulate the Suburbs: America Needs a Housing Policy That Works,” Heritage Foundation Backgrounder No. 2247, March 5, 2009.

Diane Katz, “The CFPB in Action: Consumer Bureau Harms Those It Claims to Protect,” Heritage Foundation Backgrounder No. 2760, January 22, 2013.

Diane Katz, “Reforming Consumer Financial Protection Bureau Necessary to Protect Consumers,” Heritage Foundation WebMemo No. 3216, April 7, 2011.

John L. Ligon, “Will FHA Require the Next Round of Housing Bailouts from the Taxpayer?” Heritage Foundation Issue Brief No. 3961, June 6, 2013.

John L. Ligon and William W. Beach, “Housing Market Without Fannie Mae and Freddie Mac: Economic Effects of Eliminating Government-Sponsored Enterprises in Housing,” Heritage Foundation Special Report No.127, January 8, 2013.

Norbert J. Michel and John L. Ligon, “The Federal Housing Administration: What Record of Success?,” Heritage Foundation Backgrounder No. 3006, May 11, 2015.

Norbert J. Michel and John L. Ligon, “Five Guiding Principles for Housing Finance Policy: A Free-Market Vision,” Heritage Foundation Issue Brief No. 4259, August 11, 2014.

Norbert J. Michel and John L. Ligon, “GSE Reform: The Economic Effects of Eliminating a Government Guarantee in Housing Finance,” Heritage Foundation Backgrounder No. 2877, February 7, 2014.

Norbert J. Michel and John L. Ligon, “New Fannie Bond Issue Elevates Need for Higher G-Fees,” The Heritage Foundation, The Daily Signal, September 17, 2013.

Norbert J. Michel and John L. Ligon, “Why Is Federal Housing Policy Fixated on 30-Year Fixed-Rate Mortgages?,” Heritage Foundation Backgrounder No. 2917, June 18, 2014.