Housing Finance: Past, Present, Future

This paper examines the evolution of the housing finance industry in the United States during this century. Beginning in the 1930's, the industry became the main tool of the federal housing policy that encourages the new construction of single-family homes. We argue that the incentives provided to home owners-e.g., cheap mortgage capital and the mortgage interest deduction-may serve the policy goals only in the short term, and the short term ended thirty years ago. In the long term, the incentives are not only ineffective but also harmful. In particular, they lead to economic distortions and dislocations such as the bifurcation of the central cities and suburbs, the boom-and-bust cycles in real estate, the demise of the S&L system and others. The paper recommends to privatize the FNMA and FHLMC and to gradually phase out the mortgage interest deduction.