Housing Finance Policy Looms as the Elephant in the President Trump’s Oval Office

By Norbert Michel, Heritage Foundation Financial Regulations Expert

Washington liberals have tried to convince the public that the housing finance policies started by the Clinton administration in 1994 had nothing to do with the 2008 economic crisis.  Instead, they blame the crisis on Wall Street greed and deregulation.

This year, however, Hillary Clinton and her running mate, Sen. Tim Kaine, D-Va., branched out and blamed the crisis on the Bush tax cuts. In the first presidential debate, Secretary Clinton argued:

“We had the worst financial crisis, the Great Recession, the worst since the 1930s. That was in large part because of tax policies that slashed taxes on the wealthy, failed to invest in the middle class, took their eyes off of Wall Street, and created a perfect storm.”

Ms. Clinton had better reason than most of her fellow liberals to distract people from federal housing policies, but let’s come back to that. First, let’s review those Bush tax cuts that supposedly left out the middle class. Actually, there were two rounds of cuts. The second (2003) package mostly just accelerated the tax cuts promised in the first (2001) round.

When the dust settled, the Bush tax cuts had:

  • lowered marginal rates for everyone and created a new 10 percent tax bracket to increase after-tax income for the lowest earners.
  • reduced the marriage penalty and doubled the child tax credit–reforms that did more for the lower and middle classes than for the rich.
  • made the 2001 cuts retroactive–providing tax rebates intended to help lower income households the most.

Moreover, the 2003 package lowered taxes on certain dividends, provided estate tax relief, increased expensing for small businesses, and provided relief from the alternative minimum tax. Had it not done so, many middle class folks would not have seen a tax cut.

To put it mildly, these features cast serious doubt on candidate Clinton’s remarks. To whatever extent the Bush tax cuts helped “the wealthy,” the conventional critique would be that those types of cuts are likely to provide less of a boost to the economy than providing tax relief to lower income groups because rich people are less likely to spend their additional income.

Identifying tax cuts as the cause of a recession is a bit of stretch. One of the only economic explanations for tax cuts reducing overall economic activity is this one: Deficit-financed tax cuts that require enormous increases in public debt can lead to economic chaos by causing a nation to default on its obligations.

It is unlikely that this story applies to the Bush tax cuts because U.S. Treasury securities remain, to this very day, the most sought-after safe investment in the world. So it’s pretty silly to blame the recession on Bush’s tax cuts. Unless, of course, you need a shiny object to distract people from federal housing policy.

There’s surely more than enough blame to go around for that policy. Republicans as well as Democrats screwed up the home mortgage market. But President Bill Clinton initiated the policies that took Fannie Mae (the Federal National Mortgage Association) from a bit player to a behemoth in the housing market. In 1994, President Clinton set an explicit goal of raising the U.S. homeownership rate from 64 percent to 70 percent by 2000. By itself, this was extreme folly. How he set out to accomplish it was even worse.

To accomplish his task, President Clinton created the National Partners in Homeownership, a private-public cooperative that relied largely on Fannie Mae, a government-sponsored enterprise. Fannie Mae CEO Jim Johnson then announced Fannie Mae’s Trillion Dollar Commitment, a program that earmarked $1 trillion for affordable housing between 1994 and 2000. President Clinton also signed into law the 1992 Government Sponsored Enterprise Act, a law that required the secretary of the Department of Housing and Urban Development to establish three broad affordable housing goals for Fannie Mae and another government-sponsored enterprise (GSE), Freddie Mac.

These requirements went into effect in 1995, requiring about one-third of the loans bought by Fannie and Freddie to come from designated lower income/underserved groups. The law insured that these figures would be increased several times in future years, and they were. Even under President Bush.

The goals have been a flashpoint in the debate over the 2008 crisis, because they were artfully named to support class warfare. Pretty much anyone who points to the goals as a cause of the crisis is accused of blaming the meltdown on poor people.

But the name of these so-called low-income designations hides the real problem: they facilitated a massive increase in mortgage debt. The goals were never really designed just to help a few deserving poor people get mortgages, and nobody can deny that Bill Clinton started a major push to get more American’s into housing debt. Measured by that standard, the policies worked. The U.S. homeownership rate increased from 64 percent in 1994 to 69 percent in 2004. From 1990 to 2003, Fannie and Freddie went from holding 5 percent of the nation’s mortgages ($136 billion) to more than 20 percent ($1.6 trillion).

Housing debt went up, and housing prices rose right along with it. And then they fell, and we know what the fallout looked like.

When the price bubble burst, more than 4 million people lost their homes; the U.S. homeownership rate fell back to 65 percent, and citizens were left to deal with the worst recession since the Great Depression.  To top it all off, taxpayers were forced to bail out Fannie and Freddie along with some of the nation’s largest financial firms. So while many politicians still defend the affordable housing goals as a way to help the poor, they’re distracting people from the fact these goals didn’t really produce affordable housing – under virtually any definition.

And President Trump will have little choice to deal the GSEs because current law requires Fannie Mae’s capital reserve (its buffer against losses) be taken to zero by January 2018. If President Trump wants to stop artificially inflating home prices, he’ll help Congress get rid of the GSEs and scrap the idea – once and for all – that the federal government should be encouraging anyone to get into debt.

*Originally published in Forbes, click here.

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