Reforming real estate finance

Think tank: FHA is not supposed to be 'clearinghouse'

Every few years, some members of Congress say they would like to see the functions of the Federal Housing Administration taken out of the Department of Housing and Urban Development and put into the private sector.

The historical HUD response has been that privatization would dramatically constrain the helpful programs that meet the needs of first-time homebuyers, low- and moderate-income families, and minorities. The FHA’s reason for being is to make housing more available through loan guarantee and insurance programs.

A study presented last week in the nation’s capital takes the concept even further. It proposes taking the government out of all housing finance, including the elimination of the government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac.

In a recent white paper, "Taking the Government Out of Housing Finance: Principles for Reforming the Housing Finance Market," conservative think tank American Enterprise Institute, based in Washington, D.C., said it believes the U.S. housing system fails because government support of funds encourages overbuilding and speculation and relieves investors of risk through guarantees, making it possible for mortgage originators to offer zero- or low-down-payment loans with little or no documentation.