Why the Unholy Trinity of Housing Can’t Fix Real Estate

Housing is still in the intensive care unit partially because it’s controlled largely by the U.S. government. When Washington gets involved in housing, the real estate market gets politicized. And when you politicize housing bad things can happen.

Consider the Unholy Trinity of housing — Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA). These bureaucracies may have caused more damage to the housing market with some of their misguided policies than all the usual suspects of the housing crash — Wall Street banks, financial regulators and subprime lenders.

Collectively, Fannie, Freddie and the FHA own about 250,000 foreclosed homes. More alarmingly is the fact that Fannie and Freddie (the GSEs), now wards of the state, currently back 60 percent of all new mortgages. Created by the government in 1938 to help Depression-era home buyers purchase homes, Fannie Mae, and its cousin, Freddie Mac, provided a secondary market for mortgages. Risk-taking at Fannie and Freddie was a major element in causing the housing bubble. American taxpayers have so far shelled out nearly $200 billion to keep Fannie and Freddie afloat — and the losses from foreclosures continue to mount.

Four years after Fannie and Freddie teetered, industry watchers are worrying that another government mortgage giant could be the next domino. Problems at FHA, which guarantees mortgages with low down payments, are becoming so acute that experts warn the agency might need a federal bailout. The government is so desperate to get rid of their vast empire of Fannie, Freddie and HUD foreclosures that they are planning to sell them in bulk to investors and launching a new REO rental program.

Edward J. Pinto, a research fellow at the American Enterprise Institute, fears that the FHA’s capital reserves are below the federally mandated level of 2 percent. The FHA, beset by dwindling reserves and failing loans, is part of the U.S. Department of Housing and Urban Development. HUD, which includes FHA, claims everything is alright. But Pinto warns that the FHA is already “deeply insolvent” and it will join Fannie and Freddie in bankruptcy — and U.S. taxpayers will have to bailout the FHA too.

Meanwhile, the latest Obama Administration election-year ploy is to take a chunk of the $20.9 billion in leftover TARP funds and use it to subsidize mortgage write downs at Fannie Mae for yet another backdoor bailout for the banks. Essentially, the U.S. Treasury is picking the pockets of taxpayers through TARP write downs (rewarding millions of deadbeat borrowers who aren’t paying their mortgages with free money), while the big losers are taxpayers — and borrowers foolish enough to pay their mortgage on time (punishing honest borrowers by having them pay for the foreclosure crisis clean-up engineered by federal bureaucrats in Washington).

The real crime in all of this is that Washington and their bosses — the bankers — have become so tightly intertwined that public accountability has all but vanished. The most amazing part of the housing crash is that so many of those responsible for this disaster remain in power — both in Washington and on Wall Street. More startling is that no one has gone to jail for this trillion dollar heist. The revolving door between Wall Street and the Beltway needs to be unhinged. The musical chairs must stop. If not, we’re headed for another crisis soon.

Readers, what do you think? Is a real estate market run by Uncle Sam’s Unholy Trinity a healthy thing? Is real estate better off without the feds? Or do we need a free market with limited government intervention?

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