HOUSING FINANCE CONUNDRUM / THE FINANCIAL TIMES LEX ( HIGHLY RECOMMENDED READING )

Housing finance conundrum

Published: March 23 2010 14:55

On Tuesday Tim Geithner testified before a Congressional committee considering what to do with the failed government-sponsored enterprises Fannie Mae and Freddie Mac. The US Treasury secretary spoke about the causes of the housing bubble and flaws in the system.

But before legislators get down to the nitty-gritty, some big questions need to be answered. What does the government want from the housing market? And why should it be financing house purchases at all?

Stability in the housing market is touted as “critical to achieving economic recovery and sustainable long-term growth”. Forget the contradiction of wanting stability and no doubt a recovery in house prices too. Surely government has no desire to set property values? The Federal Reserve has spent years ignoring asset prices. It is also clear that government involvement in housing finance enabled and amplified the structural problems that led to the housing bubble.

Yes, there are political motives. Home ownership may encourage stable, law-abiding communities of taxpayers to develop. But again there are contradictions, as in promoting both low-income housing and tighter lending standards. The truth is government involvement is a wholesale subsidy of one asset class. Homeowners benefit from artificially low long-term mortgage rates, with a free built-in option to refinance at a cheaper rate at any time, plus tax relief on mortgage interest. So any move toward a genuine market would be unpopular, and hurt house prices. Untangling the mortgage-backed securities market – the world’s second largest after US Treasuries – would be a further headache.

The administration is right to identify the current structure of housing finance as a problem. But it needs to ask bigger questions first.

Copyright The Financial Times Limited 2010.