For the past several years, it’s not been an uncommon sight in Anytown, USA, to drive down the street and see home after home for sale after going through foreclosure. They are the still-lingering hangover from the housing crash that began in 2007. Though the true cause of what burst America’s housing bubble is still debated, two of the culprits — housing finance giants Fannie Mae and Freddie Mac — are still going strong even though both essentially failed in 2008 and are under government control. Economists and politicians alike are now pondering whether we need Fannie Mae and Freddie Mac at all and what would happen if they were eliminated altogether.
For several years prior to 2007, home prices went through the roof, but then they crashed through the basement. Since then, more than 2.3 million homeowners have faced foreclosure — an 81 percent increase over 2007. This all, of course, contributed to the Great Recession we’re still rebuilding from today. “Easy credit” is pointed to as the corrosive acid that ate away at the housing market’s foundation, and federal government-sponsored mortgage finance giants — the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) — were there to supply it and help other lenders to do so.
Consistent with policies dating back to the Carter and Clinton Administrations, Fannie Mae and Freddie Mac made it easier for low and moderate income Americans to obtain mortgages and purchase homes. In a new paper from The Heritage Foundation, A Housing Market Without Fannie Mae and Freddie Mac: Effect on Home Prices, Nahid Anaraki reports that this “fueled an excessive expansion of credit in the housing sector, shifted the demand for real estate to the right, and caused home prices to overshoot their underlying market equilibriums.” In other words, Fannie Mae and Freddie Mac’s intervention in the housing market helped to fuel the boom-to-bust housing bubble by subsidizing interest rates and enabling reduced down payment requirements on single-family homes, thus unnaturally boosting demand and causing prices to go up.
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