By MyBankTracker  Wed Aug 11, 2010

The Future of U.S. Housing: Will Fannie and Freddie be Left Out?

It’s no secret the housing market has seen better days — and that’s including all the tax breaks and incentives offered by the federal government over the past 15 years. So what would happen if the U.S. government pulled its support of the housing market?

We might find out, if lawmakers move forward on rolling back their subsidy of major mortgage companies.

Emphasizing Prudence, not Ownership

The recent mortgage meltdown that dragged the U.S. economy into a recession occurred for a number of reasons, the most prominent being the issuing of loans to underqualified borrowers. The government’s new approach to managing the real estate market would emphasize making sure only qualified borrowers receive loans. Making rental properties available for people who might not have the means to buy a house would be an important part of the plan.

From the end of World War II to the mortgage meltdown, the government went to great lengths to encourage home ownership. The national home ownership rate went from 40% before World War II to nearly 70% in 2004. The stability of having a majority of citizens in self-owned homes was considered a positive until shoddy lending practices resulted in underqualified borrowers sinking relatively large sums of money into homes they ultimately could not pay for on terms they did not fully understand.

In the plan proposed by President Barack Obama is fully realized, low-income Americans would be encouraged to rent, rather than purchase homes. Data from the Congressional Budget Office shows that low-income rental housing is sorely lacking in many areas of the country. Of America’s poorest households, 71% spent more than half of their income on rent. A common rule of thumb suggests not devoting more than 30% of your income to housing costs. Government investment in low-income rental properties instead of the home ownership market could potentially make conditions more favorable for the nation’s poor.

A Mortgage Market Shake-Up

Fannie Mae and Freddie Mac, the embattled government-sponsored mortgage backing companies, might not fare too well in the new U.S. housing market. The two companies, which secure home loans, got caught up in the mortgage meltdown and lost billions of dollars. Because they were partially supported by the government, the nation has had to pump billions into the struggling companies to keep them afloat. The consensus in Washington is that the nation needs to divest from Freddie and Fannie in order to get a fresh start on the housing market.

In the video below, President Barack Obama discusses the status of the economic recovery and how he thinks the nation needs an infusion of new ideas to fix things:

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