The Obama Treasury Department's new housing reform report comes to the wise conclusion that Fannie Mae and Freddie Mac must be eliminated. The Tea Party and Republicans should be saying, “We can work with this.”
The fully privatized mortgage finance system outlined in the report is by far the best way to fix the housing market and help the economy’s long-term health and stability. Banks would know they faced going belly-up if they made risky loans to unqualified buyers. Taxpayers wouldn’t be bailing out mortgage companies or homebuyers who made bad decisions.
However, the report offers three proposals, and two would continue to permit federal backing of mortgages, which is in direct conflict with the report’s own admission that government guarantees have not served the public well.
Treasury’s Option 2 would try to price a government guarantee very high to avoid interfering with the private sector. It sounds good, but unfortunately, it would communicate to Wall Street that if it makes enough bad and risky decisions that threaten major parts of the economy, the government still will be there with a safety net (bailout). Option 3 would be worse. It would completely ignore the reality that federal guarantees destabilize the market and essentially just change the names of Fannie and Freddie.
Congress probably will take its time sifting through the report. But housing finance reform should not wait. Taxpayers are exposed to tremendous financial risk right now. Fannie and Freddie have cost taxpayers roughly $150 billion since they were bailed out in 2008, and estimates suggest they could end up costing taxpayers as much as $400 billion before all the toxic debt is gone. And the federal government is funding or guaranteeing more than 90 percent of new mortgages in America, meaning significant risk continues.
There are things Congress and President Obama can do right now that likely can garner bipartisan support.
Fannie and Freddie, which were supposed to help low-income and first-time homebuyers, have expanded to the point that they now guarantee individual home loans of up to $729,500 in areas with high costs of living. Congress should quickly drop that amount to $575,000 or lower this year while also lowering the standard mortgage limit from $417,000 to $300,000 or less.
The federal government also needs to immediately stop guaranteeing loans with less-than-adequate down payments. As we await full reform of Fannie and Freddie, the feds should only back loans in which the buyer puts down the traditional 20 percent of the sales price.
Congress also could pass legislation that would facilitate the adoption of mortgage finance methods that have worked well in other countries, such as five-year rollover mortgages in Canada or covered bonds in Europe.
Those ideas have been endorsed by the administration’s report and not only would protect taxpayers but would lay the groundwork for long-term reform.
As the Obama administration’s study acknowledges, any reasonable Fannie and Freddie reform is going to lead to higher interest rates and make it harder to get a home loan. But that’s not a bad thing. The government helped cause the recession by artificially lowering interest rates, encouraging banks and homebuyers to take huge risks, and by propping up the housing market.
The Treasury has the right idea: Wind down Fannie Mae and Freddie Mac. For the future of the housing market and stability of the economy, we need a clean break. President Obama and Treasury Secretary Timothy F. Geithner have taken a big step by proposing to do away with Fannie and Freddie. The Tea Party and Congress should help make it happen by pushing for a fully private, long-term reform of the housing finance sector.
Anthony Randazzo is director of economic policy at the Reason Foundation (reason.org).