Back in 2006, private financing supplied nearly $2 in outstanding household loans for every $1 in government-financed credit.
But 2012 completed a dramatic transformation that has seen the government displace the private sector as the main source of home mortgages and consumer credit, Federal Reserve data show.
Now, although the mortgage crisis has abated and home prices are back on the rise, the government's dominant role in consumer financing may persist.
New regulations after the financial crisis and the prospect that mortgage finance will be a cash cow for the Treasury may work against efforts to scale back the government's role.
That possibility was underscored last week by the White House budget forecast that Fannie Mae and Freddie Mac will provide a $183 billion windfall to Treasury over the next decade.
If so, the mortgage financing giants would fully repay $187 billion in bailout funds — and then some. Through 2012, the once-again profitable companies had already paid back $55 billion.
"The easiest thing to defend in Washington is the status quo," said Mark Calabria, director of financial regulation studies at the libertarian Cato Institute.
The prospect of a steady revenue stream from Fannie and Freddie may further bolster the status quo.
Government FinanceAt the end of 2012, government-financed home mortgages and consumer credit outstanding totaled $6.4 trillion, up from $4.4 trillion at the end of 2006. Private-sector financed loans fell to $6.3 trillion from $8.45 trillion over the same span.
The shift to government financing primarily reflects the collapse of private mortgage financing in 2007 as the housing bubble popped. Financing through government-sponsored Fannie and Freddie, as well as Ginnie Mae, which finances Federal Housing Administration mortgages, became the only game in town.
Privately financed loans made up nearly 60% of the $10 trillion home mortgage market in 2006 but now account for just 40%.
The other growth area for government lending to consumers has been student loans. Since the end of 2008, direct student loans from the government have increased by $423 billion, while other consumer credit has shriveled by $192 billion.
Subsidizing Higher TuitionSince 2010, all federal student loans come directly from the government, with the aim of cutting out the middleman to provide lower rates to borrowers.
Calabria believes that intended subsidy to borrowers via low student loan rates is often captured by universities via higher tuition. Likewise, part of the subsidy of low mortgage rates ends up in the pockets of Realtors, he says.
Although the justification for government control of the mortgage market — and the risk it entails — has weakened as bank balance sheets healed and the housing market recovered, the debate over the future of Fannie and Freddie remains on the back burner.
Dodd-Frank Curbs LendersWhile Calabria has doubts about the White House's windfall forecast, he notes that their profitability outlook would look a lot different if the mortgage finance giants couldn't access the low borrowing rates that come with government ownership.
The 2010 Dodd-Frank financial reform law also may dictate slow Fannie and Freddie reform due to new mortgage regulations.
The legislation requires private originators to retain a share of mortgages, with the idea that having skin in the game will limit irresponsible lending.
But Dodd-Frank also offers exceptions so that companies will be able to lend more freely. The skin-in-the-game rule won't apply to loans that qualify for sale to Fannie and Freddie.
Keith Leggett, senior economist at the American Bankers Association, said the new rules will require private lenders to adjust.
"At this point in time, we would not advocate any kind of drastic change" limiting the government role in the market, he said.
Meanwhile, the qualified mortgage rule still in the works could continue to keep private lenders from exposing themselves to subprime risk, keeping the FHA in control of that market.
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