Only a Private Housing Finance Market Can Produce Stability
In this policy paper, the author notes that in the last half-century, U.S. government backing for the housing finance market has consistently produced cycles of boom and bust. The reason is clear: only sound underwriting standards can produce a mortgage market with defaults of less than 1 percent, but the government has repeatedly encouraged the loosening or abandonment of standards. The affordable housing goals established for Fannie Mae and Freddie Mac were only the most recent and extensive iteration of this policy, and they fostered a massive housing bubble, a mortgage meltdown, and ultimately the financial crisis of 2008. True to form, a recent proposal by the government’s principal financial regulators has subverted the Dodd-Frank Act’s half-hearted attempt to reestablish underwriting standards and sets the stage for a return to the policies that caused the crisis. As long as government continues to control the housing finance market, continued instability and cycles of boom and bust are inevitable.