A housing market devoid of any government-backed mortgage guarantee but still serving the best interest of homeowners is inconceivable, according to a letter to the editor published in the New York Times. Many prospective homebuyers and homeowners, as well as a majority of real estate professionals, believe a stable and consistent supply of home financing can only be supplied through the mortgage market if the government provides a guarantee, promising investors the government will pay if homeowners default on their loans.

Many mortgage bankers are particularly concerned about the 30-year fixed-rate mortgage (FRM), which may become less popular for investors if not backed by the government sponsored entities (GSEs) Fannie and Freddie. The private mortgage market claims interest rates and loan fees will rise to cover the greater risk of originating a 30-year FRM without a government guarantee.

A common thread of concern among brokers and lenders alike is the fear of change. Many believe dismantling the government guarantee — especially in the midst of this existing economic turmoil — would only serve to further delay recovery.

first tuesday take: Sometimes the hardest thing to do and the right thing to do are one and the same. While eliminating Fannie and Freddie’s grip on the housing market will not necessarily be a walk in the park, it is a necessary measure to stave off yet another housing crisis. Only during a crisis can hard decisions be made and implemented, and we do not want this current crisis to go to waste.

Fannie and Freddie, as an arm of the government, must certainly continue their role as lender of last resort until the housing market stabilizes and harkens a return to fundamentals. Like the gradual tipping of a scale, the GSEs’ exit must be staggered over a period of time and unwind gracefully as the private market gains confidence and slowly takes over. [For more information regarding the fate of Fannie and Freddie, see the February 2011 first tuesday article, Frannie’s future is at stake and the March 2011 first tuesday article, Mortgage market reform from the executive branch.]

The 30-year FRM is a current necessity, but that does not automatically mean it is the best financial choice for housing our population. If interest rates are too high for lack of a government guarantee and borrowers can’t produce a 20% down payment to eliminate the risk of default covered by a government guarantee, the question we should be asking is not what kind of deal a lender is willing to make. Rather, the prudent question is whether those homebuyers are financially capable of managing homeownership at all. The economic reality for many prospective homebuyers is it would be more financially beneficial to rent than to own. [For more information regarding renting, see the February 2011 first tuesday Market Chart, Rentals: The future of real estate in CA?]

American culture heavily emphasizes homeownership as a pillar of social success. Our governmental policies in turn facilitate the achievement of that pillar, but at great cost to most individuals’ financial well-being and net worth since investors are usually the only ones fit to take the risk. As evidenced in our current taxation policies, we prize homeownership by indebtedness over living within one’s means. That policy is being rejected as the population is deleveraging in an act of revulsion. [For more information regarding homeownership tax loopholes, see the March 2011 first tuesday article, The home mortgage tax deduction: inducing debt and stifling mobility.]

Maybe the real change needs to start by evaluating the ideals our economic policies endorse…

Re: “Discouraging Home Buyers” from the New York Times