Separating economic myth from economic fact
Myth 1: The government-sponsored housing finance companies Fannie Mae
and Freddie Mac had nothing to do with the housing crisis. They were
simply innocent bystanders caught in the crossfire. Economist and New
York Times columnist Paul Krugman, for instance, has argued that
Fannie and Freddie’s role in the housing market was insignificant
between 2004 and 2006 because “they pulled back sharply after 2003,
just when housing really got crazy.” According to Krugman, Fannie and
Freddie “largely faded from the scene during the height of the housing
bubble.”
Fact 1: Fannie and Freddie contributed to the housing crisis by making
it easier for more people to take out loans for houses they could not
afford. Beginning in 2000, Fannie and Freddie took on loans with low
FICO scores, loans with low down payments, and loans with little or no
documentation.
[...]
Myth 2: Fannie and Freddie’s role in the housing market increased
homeownership, especially for first-time buyers and lower income
earners.
Fact 2: The small increase in homeownership rates were temporary and
artificial, driven by unsustainable incentives. In the best case
scenario, Fannie and Freddie may have increased the homeownership rate
from 63 percent to 69 percent, but the rate has now fallen back to 66
percent. Moreover, Fannie and Freddie did not make housing more
affordable and even priced many first-time buyers out of the market.
[...]
Myth 3: Fannie and Freddie are essential for maintaining a working
mortgage market. Without them, interest rates will increase and
homeownership will plummet as more people are priced out of the
housing market.
Fact 3: Interest rates are likely to go up. Yet it is not clear what
impact this will have on homeownership rates. In the 1980s, interest
rates on the average 30-year mortgage were significantly higher, yet
homeownership rates were almost the same as they are today. Besides,
the alternative to homeownership is not living on the street.
[...]
http://reason.com/archives/2011/03/0...fre/singlepage
http://reason.com/archives/2011/03/0...fannie-and-fre