How to Free the Housing Market from Government—and Lower Your Mortgage Payments

President Obama said something truly great in his State of the Union Address this year. He told Congress:

[S]ince the most important investment many families make is their home, send me legislation that protects taxpayers from footing the bill for a housing crisis ever again, and keeps the dream of homeownership alive for future generations.

That sounds magnificent, and we couldn’t agree more. No one wants another housing crisis, and taxpayers certainly shouldn’t be on the hook for it.


So, what should Congress do? The answer: Eliminate Fannie Mae and Freddie Mac, the government-sponsored entities (GSEs) that have been distorting the housing market for years AND costing taxpayers trillions of dollars. Taxpayers remain responsible for approximately $4 trillion in GSE guarantees.

The main thing holding America back from a better housing market is the fact that people are afraid of what would happen if the taxpayer-backed guarantees of the GSEs went away. So Heritage economists modeled what would happen to housing and the economy to find out.

We found that removing the government guarantee from housing finance should have a minimal impact on the overall U.S. economy—and it would likely result in lower housing costs, less personal debt, and higher personal income and savings.

It could also bring down monthly mortgage payments over time.

So why the fear of getting rid of Fannie and Freddie? Many people are convinced that the GSEs are integral to homeownership and lower interest rates. But here’s the truth:

  • Homeownership: Fannie and Freddie didn’t really have the earth-shaking effects on homeownership that people think. After billions in taxpayer subsidies, the long-term homeownership rate in the U.S. has remained virtually unchanged—increasing only from 63.9 percent in 1968 to 65 percent in 2013.

  • Interest rates: Research shows that homeowners may have benefited by paying, at most, 0.50 percent less in interest rates than if there had been no GSE subsidy.

Given the relatively small impact on interest rates, along with the minor long-term impact on homeownership rates, it is difficult to argue that the GSE subsidies are necessary for the housing market to function properly.

-John Ligon and Norbert Michel


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