As the housing policy debate heats up this year, there will be two relatively clearly delineated sides. Those who think the government's presence in the mortgage market is a good idea will fight to keep a federal guarantee in place for most mortgages. Those who prefer a free-market approach will assert that the government should exit the industry. Libertarian-leaning think tank American Enterprise Institute (AEI) is likely to be one of the loudest voices in that latter group. It published a policy paper (.pdf) on housing finance on Thursday. You might be surprised to learn, however, that it does allow for the government to have some presence in the housing market.
Of course, AEI generally wants to do away with government guarantees. So most of the paper predictably advocates for less government. It offers four main principles that it says should be followed:
I. The housing finance market--like other US industries and housing finance systems in most other developed countries--can and should principally function without any direct government financial support.
II. To the extent that regulation is necessary, it should be focused on ensuring mortgage credit quality.
III. All programs for assisting low-income families to become home-owners should be on-budget and should limit risks to both homeowners and taxpayers.
IV. Fannie Mae and Freddie Mac should be eliminated as government-sponsored enterprises (GSEs) over time.
Its first section is probably the paper's most important; it argues that the mortgage market can survive without a government backstop. To support this claim, it provides evidence from studies and examples of nations with successful mortgage markets that lack government guarantees. But in its second section, AEI begins to explains some ways that the government can still play a role in housing.