Affordable Housing vs. Affordable Mortgages

by Sameer Warraich Anthony Randazzo of the Reason Foundation recently published an article discussing the effect of government intervention in the mortgage market. As with many government interventions to expand home ownership, there are unintended consequences. While some groups are criticizing a move to make “qualified residential mortgage” guidelines more strict, Randazzo highlights the often overlooked difference between affordable...

by Sameer Warraich

Anthony Randazzo of the Reason Foundation recently published an article discussing the effect of government intervention in the mortgage market. As with many government interventions to expand home ownership, there are unintended consequences. While some groups are criticizing a move to make “qualified residential mortgage” guidelines more strict, Randazzo highlights the often overlooked difference between affordable housing and affordable mortgages. He contends:

It’s not that Washington should force prices to go lower, it’s that La Raza and other consumer organizations should be clamoring for the government to get out of the way to let prices finish their fall back to natural levels. That would help first-time home-buyers since housing would become more affordable.

If we’ve learned anything from the recession it’s that government’s goal of providing affordable housing for all has serious repercussions. In the early 2000s, for some home-buyers, the standards were relaxed to the point where there were no down payment at all required, contrary to a long-standing tradition that home-buyers should have some stake in the home, so as to reduce the risk of default on the mortgage. The reduction or elimination of traditional safeguards in mortgage lending lead to increased risk in the mortgages acquired by Fannie Mae and Freddie Mac under the new and lower mortgage loan approval standards. Government backed Fannie Mae and Freddie Mac expanded their purchases of sub-prime mortgages, in the hope of expanding the number of American homeowners throughout the 2000s. This caused housing prices to grow, making housing less affordable for low-income families. This was partly because as mortgage prices fell, demand increased for homes, and prices rose, hence, less people were able to acquire new homes.

Now that the home values have been dropping on a national level, the government should abstain from interfering in the market and let the prices fall back to natural levels. A market-based decrease in housing prices would enable more and more Americans to become homeowners without the economic problems that have accompanied the artificially low-cost, government backed mortgages of prior years.