How the government can fix the housing market by getting out of it 

Before legislators back down from their bid to end the government's entanglement with housing policy, they may turn to Peter Wallison and Edward Pinto's joint paper, "Taking the Government Out of Housing Finance: Principles for Reforming the Housing Finance Market." The paper outlines four simple rules:

The housing finance market—like other US industries and housing finance systems in most other developed countries—can and should principally function without any direct government financial support.

Government involvement will always promise big, but eventually, underwriting standards will deteriorate, regulation of issuers will fail, and taxpayers will take losses once again.

To the extent that regulation is necessary, it should be focused on ensuring mortgage credit quality.

Prime mortgages are good investments because they are less likely to fail. As Wallison and Pinto note: "Bubbles in turn spawn subprime and other risky lending, as most participants in the housing market come to believe that housing prices will continue to rise, making good loans out of weak ones. Bubbles and the losses suffered when they deflate can be minimized by interrupting this process—by inhibiting the creation of weak and risky mortgages through appropriate regulation."

All programs for assisting low-income families to become home-owners should be on-budget and should limit risks to both homeowners and taxpayers.

Low-income lending needs to be balanced against the risks, otherwise another economic cataclysm could wind up hurting those in need, and effectively canceling out any benefit the original social policy had.

Fannie Mae and Freddie Mac should be eliminated as government-sponsored enterprises (GSEs) over time.

Gradual elimination would allow the private sector to take on more of the secondary market as the GSEs depart. It can be done by "reducing the conforming loan limit by 20 percent each year, according to a published schedule so the private sector knows what to expect."

About The Author

J.P. Freire

Bio:
J.P. Freire is the associate editor of commentary. Previously he was the managing editor of the American Spectator. Freire was named journalist of the year for 2009 by the Conservative Political Action Conference (CPAC). You can follow him on Twitter here. Besides the Spectator, Freire's work has appeared in... more
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