America's Unique, Yet Unsuccessful Housing And Mortgage Policies

by: Mark J. Perry
The Richmond Fed has an interesting cover story in its second quarter publication titled "Foreign Housing Finance," with some interesting comparisons of U.S. housing finance, mortgage markets, and housing policy to other countries. Here's an excerpt:

It is common for developed-country governments to intervene in the provision of housing services. Many have state-owned rental properties for example, and most have housing programs targeted to lower-income families. Nearly every industrialized country also encourages the direct ownership of homes through tax breaks and other policies — but none does so to the extent of the United States.

“Compared to other developed countries, only a couple come even close,” says economist John Kiff, who in April 2011 published a comparative analysis with colleagues at the International Monetary Fund (NYSE:IMF). “You’ve got interest payment deductibility, nonrecourse [mortgages] in some states, special protections in bankruptcy courts,” among other things, he says. Then there’s the support of mortgage finance by Fannie Mae and Freddie Mac, the creatures of statute known as government-sponsored enterprises (GSEs). “Everything you could possibly name for supporting homeownership for everybody regardless of whether they can afford it, it’s all in place in the U.S.”

Given that the United States pours relatively more public resources into promoting homeownership, one might expect an obvious reflection in homeownership rates. This is not quite the case. At about 67 percent, the U.S. homeownership rate — defined as the ratio of occupied housing units that are owned by the resident — falls squarely in the middle of the pack among developed nations, although it should be noted that many factors affect homeownership, from rental policies to zoning regulations to intangibles such as culture (see chart above).

By some measures, we actually perform worse. The United States experienced a greater percentage of mortgage defaults during the recent global housing market decline than any other developed nation, despite some occurrences of larger housing booms and busts elsewhere. About 8 percent of U.S. mortgages were in default at the end of 2010, down from almost 10 percent a year earlier. Countries differ in what legally count as mortgage defaults, or “arrears,” but according to local definitions, almost 6 percent of Irish mortgages were 90 or more days in arrears in late 2010. Spain and the United Kingdom trailed at about 3 percent and 2 percent of mortgages, respectively, and defaults in most other developed countries hovered below 1 percent.

Whatever benefits the government’s support of homeownership has bought for the United States, its costs are evident. The government has injected more than $150 billion so far toward rescuing housing agencies Fannie Mae and Freddie Mac, whose support of the mortgage market resulted in record losses. U.S. housing policies heavily encourage consumers to build housing debt (as opposed to equity), which some data suggest may have helped to turn the unprecedented housing decline of the late 2000s into the major recession that followed.

There are two excellent sidebar articles that accompany the main article, one on how U.S. housing policies encourage excessive debt (over equity), and another one on the 30-year fixed rate mortgage, both are worth reading.

One conclusion from the article might be that even with our political obsession and public policies directed towards increasing homeownerhsip, we still never achieved the levels of homeownership in countries like Canada, Australia, Ireland and Italy that don't promote homeownership as aggressively as in the U.S. And it was the political obsession with homeownership that was largely responsible for the housing bubble, deterioration of credit standards, mortgage meltdown, and financial crisis. So the political obsession with homeownership failed by every measure.