Unintended Consequences of US Housing Policy

In this morning’s Wall Street Journal op-ed page, Michael Milken makes a compelling argument that federal policies designed to increase home buying hurt the middle and lower classes.

The American culture of consumption is exacerbated by policies that encourage home buying:

[E]xtensive tax advantages, no recourse against the borrowers’ nonresidential assets if they walk away, and typically no protection for the lender if the borrower prepays the loan to get a lower rate.

Compare our culture on this front to those of other countries:Im-from-the-government

By contrast, according to CLSA Asia-Pacific Markets, middle-class households in 11 Asian nations spend an average 15% of income on supplemental education for their children—nearly as much as the 16% spent on housing and transportation combined. Americans spend only 2% on supplemental education and 50% on housing and transportation.

Then there is a regulatory apparatus that, despite its best intentions, leads to inconsistent enforcement:

Consumers can sue if the volume of loans to any racial group or aggrieved class differs substantially from loans to other groups. No intent to discriminate is required, and it’s illegal for a mortgage application to ask the borrower’s race. Financial institutions trying to avoid making bad loans by implementing prudent underwriting practices can inadvertently get in trouble. A bank forced to pay a fine one year because it irresponsibly made “predatory” loans to people with bad credit can be fined the next year for not making similar loans.

What’s a better solution?

Rather than hold or securitize mortgages, Fannie and Freddie [should] retain only a limited role as secondary guarantors. With the government as a backstop and private capital risking the first loss, mortgage interest rates would undoubtedly rise. But the taxpayer subsidy would fall. It’s a reasonable trade off to transfer risk from taxpayers to investors and let the market determine rates.

What could we do with that tax revenue? Build an “infrastructure of opportunity” by investing in new roads, better education, and improved health.


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