The Free Press, Mankato, MN

August 9, 2013

Cut loose Freddie, Fannie

Why it matters: Taxpayer risk is too high with current mortgage lenders

The Mankato Free Press

---- — Bipartisan plans moving through Congress to stabilize the housing market and reduce taxpayer risk in the mortgage market are a step in the right direction.

A Senate bipartisan plan as well as a more partisan GOP plan moving through the House would wind down the business of and eventually eliminate Fannie Mae and Freddie Mac, the quasi-government mortgage lenders that exploded in the financial crisis of 2008.

Freddie and Fannie had a great deal while it lasted. The public took the risk for private gain. As the entities owned or were behind nearly 90 percent of mortgages in the country, they melted down with the housing bubble of 2008 and had to be bailed out by taxpayers to a tune of $187 billion, the biggest of all bailouts.

The mostly privately-owned entities provided bonuses to CEOs all the while the government and taxpayers were backing their bad bets. The entities have since paid back about $132 billion of taxpayer funds, but there have been universal calls to eliminate them and transition their business to other agencies.

President Barack Obama said Tuesday that he supported the bipartisan Senate plan authored by Sen. Bob Corker, R-Tenn., and Sen. Mark Warner, D-Va., that, according to Warner, would get rid of the model of “private gains and public losses.”

Their plan would phase out the agencies over five years and replace them with a new agency like the Federal Deposit Insurance Corp., the agency that insures bank deposits. The new agency would be funded by industry fees and have a much smaller role in backing mortgages. Their plan also aims to create a system of some government guarantees where the 30-year fixed rate mortgage would still be a large part of the mortgage market.

Obama has endorsed this approach saying owning a home is still part of the American Dream for the middle class.

The House GOP plan also calls for closing the mortgage lenders — which are now in conservatorship — but would greatly reduce the amount of government guarantees in the mortgage market.

It aims to put private capital as the centerpiece of the mortgage guarantee market, and critics argue that would reduce the availability of the 30-year mortgage or at least make them more expensive.

A middle ground seems feasible here. It’s a positive sign that both Democrats and Republicans want to eliminate and not reform Fannie and Freddie.

Clearly, putting the risk of 90 percent of the mortgage market on a taxpayer-backed agency is not good policy. If the government will continue to guarantee some mortgages — and Republicans say it will even under their plan — there should be shared risk between taxpayers and the private sector, and of course, the borrower.

Under the old system, some banks didn’t pay a lot of attention to the risks of mortgage loans they were making because they knew if the loans went bad, the government would be there to bail them out. A reformed government guarantee system should eliminate that incentive.

Many economists agree forming a household and buying a house creates economic activity that is spread far and wide. But that should be a secondary concern given our experience with taxpayer risk in the mortgage market. Congress and presidents have gotten into trouble trying to create an American Dream that emanates mostly from the government.

The House and Senate owe it to taxpayers and homeowners to come together on a bipartisan solution to this problem that has been hanging around our necks for almost five years now.

As the housing market comes back, we need to make sure the mortgage market doesn’t carry undue risk for taxpayers, borrowers or responsible lenders.

Obama needs to follow through as well on his push to “lay a rock-solid foundation to make sure the kind of crisis we went through never happens again. “