How to Fix the Mortgage Market
What to do about a mortgage market that has become a ward of the federal government is one of the biggest questions left over from the 2008 financial crisis. Two senators -- South Dakota Democrat Tim Johnson and Idaho Republican Mike Crapo -- have come up with an answer that makes sense, at least for now.
The history of mortgage giants Fannie Mae and Freddie Mac demonstrates eloquently the dangers of their quasi-government status, and of too-big-to-fail financial institutions in general. The companies' private shareholders benefited vastly during the housing boom of the 2000s, thanks in large part to low borrowing costs predicated on the market's assumption that the government would rescue creditors in an emergency. That assumption proved correct in 2008 when, at great taxpayer expense, the Treasury stepped in and took over.
The nationalization (in all but name) of Fannie and Freddie has taken the government far deeper into the mortgage business than it ever intended to go. The companies have about $5.2 trillion in assets, more than any bank on the planet. Government entities back roughly eight in 10 new mortgages, mainly by buying them from private lenders.
With housing prices and the broader economy gradually recovering, now would be a good time to start weaning the mortgage market from taxpayer support. Problem is, the status quo benefits a lot of powerful interests. The Treasury stands to reap about $180 billion over the next 10 years from Fannie and Freddie, which have become immensely profitable amid the housing rebound. Some hedge funds have made good money betting that shareholders might get a piece of the action. Banks and real estate professionals are loath to lose a steady buyer of mortgages.
Interests aside, reasonable people can disagree about the government's proper role. Some Republicans would like to see it gone from the mortgage business altogether. Some Democrats want the government to do more -- in support of affordable housing for those on low incomes, for instance. There's a risk that the 30-year fixed-rate mortgage, the standard U.S. product, would disappear in the absence of government involvement. Perhaps it should disappear, but that's a change the country isn't ready for.
The Johnson-Crapo proposalmaps out a course that all should be able to accept -- if not this year, with elections looming, then soon after. It would gradually replace Fannie and Freddie with a system in which the government, instead of buying loans outright, would sell a sort of catastrophe insurance on privately held mortgage securities. Taxpayers would cover only those losses that exceeded 10 percent, ensuring that private investors had skin in the game. To protect smaller banks' access to the market, a cooperative owned by small lenders would provide cash for mortgages. Some of the insurance fees would be spent on subsidies for affordable housing.
It's far from perfect, but paring down government involvement in housing to the level envisioned by Johnson and Crapo would be a huge achievement. If the plan succeeds, it will be easier to have an intelligent debate about the government's proper long-term role, and take further steps later.
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