The Federal Housing Finance Agency (FHFA) just announced it would require Fannie and Freddie to expand their affordable housing mandates. For more than 50 years, U.S. housing policy has relied on looser and looser mortgage lending standards in a misguided effort to promote broader home ownership and accomplish wealth accumulation, particularly for low-income households. For nearly half that time, Fannie Mae and Freddie Mac have been required to meet low-income housing mandates. These misguided efforts have achieved neither goal–our home ownership rate is no higher today than it was in the early 1960s and low-income households (those in the 20th to 40th percentile of the income distribution) had a median net worth of only $22,400 in 2013, the lowest inflation-adjusted amount in any of the Fed surveys dating back to 1989.
Simple economics explains why FHFA’s affordable housing mandates are doomed to failure. Research as far back as the 1950s has shown the liberalization of credit terms creates demand pressure that easily becomes capitalized into higher prices when undertaken in a seller’s market (link: When is a price cut not a price cut?).
As Einstein notes, insanity is defined as doing the same thing over and over again and expecting a different result.
The affordable housing mandates should be abandoned. Housing finance needs to focus on the twin goals of sustainable lending and wealth building. The new Wealth Building Home Loan that Stephen Oliner and I developed does exactly that. It offers a much safer and secure path to home ownership and financial security than the slowly amortizing, government guaranteed, 30-year mortgage.