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Business Forum: Are we ever going to fix Fannie, Freddie?
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I know that Congress and the Obama administration have their hands full with the debt ceiling, the threat of budget "sequester" and the related battle over how much to raise taxes and cut entitlement spending. Even so, I have to ask: Are they ever going to get around to fixing Fannie Mae and Freddie Mac?
The ultimate fate of these two giant government-sponsored enterprises, which back or guarantee most home mortgages in the United States, might be as important to the economy as the federal debt.
Yet their future has been unsettled since September 2008, when their regulator, the Federal Housing Finance Agency, seized control and declared them unable to withstand the housing market crash without an infusion of taxpayer funds. And that infusion has been massive: $187.5 billion.
As intended, the bailout, or "conservatorship," as it's formally known, prevented a collapse that could have reverberated around the world, where investors -- including the central banks of China, Japan and other major nations -- hold hundreds of billions of dollars' worth of the government-sponsored enterprise securities.
But the housing finance agency's conservatorship was never meant to be permanent.
As long as they're in limbo, the government-sponsored enterprises can't plan a strategy. Above all, the housing market will remain too uncertain for the kind of private-sector commitments upon which its full recovery depends.
In recent years the government-sponsored enterprises have been a bone of partisan contention. Democrats generally supported them as a positive legacy of the New Deal and Great Society that helped promote homeownership and build the middle class. Republicans decried them as corporate welfare for the housing industry.
Neither side was free of self-interest: Democrats milked them to fund projects backed by their various constituencies; the GOP critique echoed that of Wall Street, which was encroaching on the government-sponsored enterprises' mortgage securitization business.
At various times, politicians from both parties engaged in boosterism about the "American dream" and used the government-sponsored enterprises to advance it. Both responded to real estate agents, mortgage bankers and other hometown interests.
Still, experience mostly vindicates the critics. Profit-motivated private investors owned stock in the government-sponsored enterprises; managers pursued shareholder profits with a funding advantage based on the implicit, but real, taxpayer guarantee. This encouraged Fannie and Freddie to take on excessive risk, with disastrous results.
To its credit, the Obama administration has identified the government-sponsored enterprises' "structural design flaws, combined with failures in management," as "the primary cause of their collapse" -- as a Treasury Department report put it in 2011. The administration argued that reform should avoid re-creating the government-sponsored enterprises' public-private conflict.
Yet while the administration outlined several overhaul options, it did not push for any of them. (Republicans have floated plans with equal futility.) Meanwhile, the administration pressured the housing finance agency to manipulate government-sponsored enterprises' finances in favor of underwater homeowners -- ostensibly to free up cash for consumer spending and short-term economic growth.
Edward F. DeMarco, acting director of the Federal Housing Finance Agency, justifiably resisted using the government-sponsored enterprises yet again as an off-budget cash cow. His reward was extravagant vilification from progressives, who launched an election-year Internet campaign blaming him for the sour economy and demanding his firing.
The government-sponsored enterprises are shrinking gradually, as well as stabilizing. With administration support, they raised fees to securitize loans, and Mr. DeMarco recently agreed with the U.S. Treasury Department on modifications to the bailout that will help slim the government-sponsored enterprises even faster.
The time is ripe for a conclusive fix. Despite the partisan wrangling and interest-group lobbying -- not to mention legitimate policy disagreements -- basic principles of a new mortgage finance system are widely agreed upon. There should be no more confusion of public mission and private profit; government support, if any, should be transparent and limited to the truly needy.
The American dream of homeownership is a good thing. Alas, we've been trying to have too much of it.
First Published January 19, 2013 12:00 am
