The housing market is recovering. Prices are rising, the number of foreclosures is falling, and construction crews are finally starting to build again. But in one key way, housing remains in crisis mode: The U.S. housing market is still a ward of the state.
The vast majority of new mortgages — $1.6 trillion out of a total of $1.9 trillion last year alone— are guaranteed by the federal government. If a borrower defaults on a guaranteed loan, taxpayers are on the hook.
This is one of those semi-hidden subsidies that distort the economy and can leave taxpayers with a huge bill if there's another big downturn. It was supposed to be temporary, something that would be unwound once the crisis ended. But more than four years since crisis peaked, there's no clear plan to get the government out of the business of guaranteeing America's mortgages.
The government has always backed some mortgages to make it easier for people like veterans and low-income, first-time home buyers to get into the housing market. But during the crisis, the government's role exploded.
Fannie Mae and Freddie Mac, private companies that guarantee mortgages, collapsed and were taken over by the government. Then, as private lenders pulled out and the market collapsed, the government increased the size of the loans guaranteed by Fannie and Freddie and other government programs. As a result, the government now guarantees almost the entire mortgage market.
Last week, the agency that oversees Fannie and Freddie said certain operations of the two firms would be consolidaded. This apparently boring, technical announcement got a fair bit of news coverage, which made me wonder if I was missing something. I called Guy Cecala, publisher of Inside Mortgage Finance, to ask if this was a bigger deal than it seemed. It wasn't.
"It's just that there hasn't been anything concrete in the last five years of discussing Fannie Mae and Freddie Mac and the housing market," he told me. "So we get excited about something as small as this."
Cecala said the housing market is healthy enough to support more substantive steps, including lowering the cap on loans guaranteed by the government. The government currently guarantees some mortgages over $700,000, which, at 14 times the median household income, is far more than most middle class families can afford.
"There's plenty of private capital to come in now and pick up the slack," Cecala said. But, as always, legislators are wary of doing anything that threatens home prices. "No one wants to be accused of killing the recovery in the housing market," he said.