Last week, a Congressional subcommittee approved a series of bills designed to wind down Fannie Mae and Freddie Mac, the mortgage giants that were taken over by the Treasury Department three years ago. In Canada's National Post, Reason intern Jesse Kline writes about the lessons that Canada can learn from the effects of government intervention in the housing market:
Three years after the global financial crisis started, due in large part to troubles in the U.S. housing market, the American government is just now beginning to address the issue of Fannie Mae and Freddie Mac, the government sponsored enterprises that helped fuel the housing crisis.
By purchasing and insuring risky mortgages, backed by an implicit guarantee from the federal government, Fannie and Freddie created perverse incentives for mortgage originators to give out bad loans. A new study by Anthony Randazzo at the Reason Foundation found that these guarantees always underprice risk, drive mortgage investment into unsafe markets and inflate housing prices by distorting the allocation of capital -all of which eventually created a U.S. housing bubble that burst in the lead-up to the 2008 financial crisis.
When the bubble burst, the mortgage giants were taken over by the federal government, and have since been suckling on the taxpayer's teat to the tune of $154-billion and counting. As a result, even the Obama administration has come out in favour of reducing the government's role in the housing industry.
A similar situation in Canada would put a significant strain on the treasury, because the Canadian government explicitly guarantees a significant portion of outstanding mortgages through the Canada Mortgage and Housing Corporation (CMHC), the crown corporation that insures and securitizes mortgages.
More from Reason on Fannie and Freddie here.