(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
By Agnes T. Crane
NEW YORK, March 21 (Reuters Breakingviews) - George
Osborne's new mortgage subsidy program misses an important
lesson of the U.S. housing debacle. The British chancellor hopes
to boost housing, and by extension a still-struggling UK
economy, by guaranteeing home loans. It sounds like the
beginnings of an approach that saddled taxpayers across the
Atlantic with huge losses at Fannie Mae FNMA.OB and Freddie
Help to Buy, as it's called, is part of a 5.4 billion pound
package of housing support in Wednesday's budget. Osborne's
Treasury will either provide a partial guarantee for a mortgage
or, for new-build homes, directly lend the buyer up to 20
percent of the home's value. Under both schemes, the borrower
would only need to find a 5 percent down-payment.
The United States has already tried following this road. Its
quest to make the dream of home ownership a reality – even for
those who couldn't, in reality, afford it – led to the creation
of giant quasi-government agencies which dominated the market
for standardized loans and left scope for reckless lending by
private firms. The shortcomings of Fannie and Freddie were laid
bare by the housing collapse, and Uncle Sam had to rescue them.
They have so far needed $189 billion of taxpayers' money.
Subsidizing home ownership scores political points but the
UK scheme, like the one in America, provides the wrong
incentives. It encourages borrowers to stretch themselves, and
lures banks into riskier lending in the knowledge that the
government takes a slice of any losses. It could also achieve
little except to push housing prices higher, leaving homes no
more affordable. Unlike the United States, the UK long ago
stopped allowing taxpayers to deduct mortgage interest.
Reintroducing a version of the same kind of distorting subsidy
is a backward step.
Cash-strapped Osborne knows that loan guarantees cost
nothing to offer – at first. And if the program ends in 2017 as
proposed, it may not go bad. The devil in the idea, though, is
that successor politicians won’t find it easy to abandon. In the
United States, borrowers, investors, homebuilders and real
estate salespeople are arrayed against any government pullback
from the market, and even the discredited Fannie Mae and Freddie
Mac seem indestructible. Letting a Limey Muck take root across
the pond would only build trouble.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- The budget unveiled on March 20 by UK Chancellor George
Osborne includes a 5.4 billion pound package that aims to
increase home ownership. The government plans to lend qualifying
home buyers an amount equal to 20 percent of the home's value or
provide a partial mortgage guarantee to help reduce the cost of
financing. Under both schemes, a home buyer would only need to
find a 5 percent down payment.
- UK Help to Buy program: link.reuters.com/kys76t
Britain offers help to struggling home buyers
UK's Osborne says homes package won't spur bubble
TAKE A LOOK-Britain's budget [ID:nL6N0CA74N]
Austere generosity [ID:nL6N0CCFDA]
Shut the shelter [ID:nL4N0C05AM]
- For previous columns by the author, Reuters customers can
click on [CRANE/]
(Editing by Richard Beales and Martin Langfield)
Keywords: BREAKINGVIEWS USA/HOUSING UK
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