GSE Reform: The Economic Effects of Eliminating a Government Guarantee in Housing Finance

The U.S. government was barely involved in the housing finance market before the Great Depression. Subsequently, the Federal National Mortgage Association (commonly known as Fannie Mae) and the Federal Housing Administration (FHA) attained an almost legendary status for having "saved” the housing market in the 1930s with various forms of government guarantees. The perceived success of these institutions has led many—including many Members of Congress—to suggest that the housing market cannot properly function without a government guarantee. One of the great ironies is that the government programs initiated in the early 1930s were nationalized versions of innovations that had long existed in the private market.


Furthermore, evidence suggests that these government programs were not the main drivers behind the postwar housing boom that followed the Depression. There is little reason, therefore, to argue that the housing market needs a government guarantee.

This report discusses key elements of the Depression-era mortgage market and presents evidence that eliminating the mortgage interest rate subsidy generated by the government-sponsored enterprises (GSEs) would have minimal impact on the U.S economy. Congress should eliminate government guarantees from the U.S. housing finance market because:

  • The government guarantees that originated in the 1930s were nationalized versions of market-driven innovations. Instead of eliminating financial risk, nationalizing these innovations only expanded that risk and shifted it onto taxpayers.

  • The government guarantees in the housing finance system were not the main driver of the postwar housing boom, and they remained a small part of the market until the 1990s. As the GSEs became dominant, they nearly destroyed the housing market.

  • The GSE system is one of the main ways that government policy has encouraged investments in the housing sector at the expense of other areas of the economy. Government policy should not favor one industry over another.

  • After billions in taxpayer subsidies, the long-term homeownership rate in the U.S. has remained virtually unchanged—from 63.9 percent in 1968 to 65 percent in 2013. Yet taxpayers remain responsible for approximately $4 trillion in GSE guarantees.

  • Removing the government guarantee from housing finance would have minimal impact on the overall U.S. economy and would likely result in lower housing costs, less personal debt, and higher personal income and savings.



-John L. Ligon and Norbert J. Michel, Ph.D.


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