Government Policy Toward Homeownership

Since the 1920s the US government has encouraged homeownership over renting. Franklin D. Roosevelt said that “a nation of homeowners is unconquerable”. There is a large literature [See article here] that argues that homeownership is associated with substantial economic and social benefits, including more education, less crime and better health. This has resulted in a large amount of policy energy dedicated toward expanding homeownership from less than 50% of the population in the 1940s to almost 70% in the last few years.

The nature of government support for homeowners takes many forms. A major financial incentive is the tax deductibility of interest rate payments for most mortgages. The traditional US mortgage is a 30-year fixed rate loan with constant payments. The first few years of payments for such a mortgage will be largely interest and only a small amount of principal; since mortgage interest is tax deductible, the typical home owner (whose income is largely in the form of salary from which taxes are withheld) will receive a significant refund when he files his taxes the next year. While there has been much discussion of a revision of the US tax code in recent years, very few politicians are willing to challenge the mortgage interest deduction.

Beyond the tax deduction, the government provides strong support for the mortgage market.

  • Ginnie Mae (GNMA), Fannie Mae (FNMA) and Freddie Mac (FHLMC) are government sponsored enterprises that reduce the cost of mortgages to homeowners somewhat. They are private corporations (owned by shareholders) that provide services to allow companies that make loans to home buyers a way to resell them to institutional investors. Their government sponsorship is interpreted by some as implying that the government might help them if they got into trouble, but this is unclear.
  • The Federal Housing Administration (FHA), is a government agency that among other things is the largest insurer of mortgages in the world.
  • Federal Home Loan Banks (FHLB) are a system similar to the Fed, of 12 regional banks (government sponsored enterprises owned by local banks) that provide liquidity to mortgage lenders.

While the government does not spend a large part of its budget on housing (a number of the programs noted above typically earn a profit or break even, although the source of the profitability is partially due to their use of the government’s ability to borrow money cheaply), there are important resources used to increase the rate of homeownership (and more recently, to help some of those who took out loans that they cannot afford to pay back).

One lesson of the recent housing crisis is the asymmetric nature of the risks taken by intermediaries in the mortgage market. Private institutions (such as banks) that provided services similar to those that the above agencies made modest profits when homeowners were paying their loans but faced huge losses once homeowners stopped paying their loans. The cost to taxpayers for the implied backing of the government for the programs listed above is virtually zero in good times, but if there is ever a serious housing crisis in the US it could end up being quite large (note that the current housing crisis is fairly modest by the standards of the Great Depression of the 1930s).

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