Competing visions for the future of housing finance
A House reform would get government out of mortgages. The Senate reform is phony.

Frontpage / Shutterstock.com

Article Highlights

  • The bill that the House will consider proposes a housing-finance market that is predominantly operated by the private sector.

    Tweet This

  • Unfortunately, the president's plan, which retains a role for the government as ultimate guarantor of the housing-finance system, is faux reform.

    Tweet This

  • The Senate bill is likely to be a proposal that keeps the government in control.

    Tweet This

With the House Financial Services Committee's recent vote for legislation that would gradually eliminate the government-sponsored mortgage lenders Fannie Mae and Freddie Mac, it's possible to envision a national debate about the future of housing finance. President Obama finally joined that debate on Aug. 6, when he suggested to an audience in Phoenix that Fannie and Freddie should be replaced with a greater role for private lending. Unfortunately, the president's plan, which retains a role for the government as ultimate guarantor of the housing-finance system, is faux reform.

The bill that the House will consider proposes a housing-finance market that is predominantly operated by the private sector. The Senate bill is likely to be a proposal that keeps the government in control.

The choice of two visions is important—and all too rare in housing finance. In the past, the usual Washington consensus that the government must control housing finance emerged from Congress. Voters have never been given the opportunity to consider whether a government role makes sense, or why housing—unlike every other sector of the economy—needs government backing. Because of the House bill, the decision will not be locked up by the Government Mortgage Complex—the realtors, home builders and community activists—before people have had an opportunity to weigh in with their elected representatives.

The government's record in housing is not enviable. The 2008 financial crisis was triggered by an unprecedented 30% loss in home values when an enormous housing-bubble collapsed. Before the crisis began, at least half of all mortgages in the U.S.—28 million loans—were subprime or otherwise risky, and their failure in substantial numbers is what drove prices down. Of the 28 million risky loans, 74% were on the books of government agencies, principally Fannie and Freddie. This shows that the demand for those mortgages originated with the government's housing policies.

The terrible events of 2008 are only the most recent government fiasco in housing. There was the collapse of the government-insured savings and loans in the 1980s (costing taxpayers at least $150 billion in bailouts), the insolvency of Fannie and Freddie (more than $180 billion in bailouts) and, coming soon, a bailout of the Federal Housing Administration. With this record, it's amazing that anyone is seriously thinking about giving the government another chance.

That's why the House bill—called the Protect American Taxpayers and Homeowners (PATH) Act—is a real reform. The House bill winds down Fannie and Freddie over five years. It charters a new FHA as an independent, nonprofit corporation that will assist low-income first-time home buyers. It sets up a utility to regularize and organize a private securitization system, and eliminates many of the obstacles in the Dodd-Frank financial-reform law to the return of a private market in mortgages.

The chief House sponsors, Jeb Hensarling (R., Texas), chairman of the House Financial Services Committee, and Scott Garrett (R., N.J.) believe that a private housing-finance system will be more stable than the government programs of the past, and will pose no threat to taxpayers. As important, it won't encourage loans to borrowers with weak credit histories, which would only ensure that they lose their homes when the next government-induced housing bubble deflates.

Even former Rep. Barney Frank, once the most stalwart defender of Fannie and Freddie, finally realized that the intended beneficiaries of government housing policies are actually its greatest victims. He said in 2010, "I hope by next year we'll have abolished Fannie and Freddie. It was a mistake to push lower-income people into housing they couldn't afford and couldn't really handle once they had it."

The Senate rival to the House bill is likely to be a proposal by Sens. Bob Corker (R., Tenn.) and Mark Warner (D., Va.) that would create a new government agency, like the FDIC, to guarantee mortgage-backed securities. Its sponsors promise that private risk-sharing will eliminate the chances of a taxpayer bailout. But any proposal that keeps the government in charge of housing finance will be subject to the same infirmity: Congress will always want to extend the program's benefits to more constituents, especially to those who—because of weak credit histories and uncertain financial resources—are unable to qualify for conventional mortgages.

It will then turn out—much to everyone's surprise—that compensating for the inherent risks of a subprime mortgage will make it too costly for those whom Congress wants to help. So the answer will be for the government to subsidize these mortgages, probably by lowering its own insurance rates.

That's the movie taxpayers have seen before, when Fannie and Freddie were required to reduce their underwriting standards in order to make mortgage credit available to potential home buyers who were said to be "underserved."

It's no secret why the Senate bill keeps the government in the game. It's easy to pass a phony reform that makes Congress look good and gives the Realtors, home builders and community activists what they want. Instead of the usual cave-in to the Government Mortgage Complex, the House bill will give the American people a rare opportunity to consider an alternative future for housing finance.

Mr. Wallison is a senior fellow at the American Enterprise Institute.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Peter J.
Wallison

What's new on AEI

AEI Election Watch 2014: What will happen and why it matters
image A nation divided by marriage
image Teaching reform
image Socialist party pushing $20 minimum wage defends $13-an-hour job listing
AEI on Facebook
Events Calendar
  • 20
    MON
  • 21
    TUE
  • 22
    WED
  • 23
    THU
  • 24
    FRI
Monday, October 20, 2014 | 2:00 p.m. – 3:30 p.m.
Warfare beneath the waves: The undersea domain in Asia

We welcome you to join us for a panel discussion of the undersea military competition occurring in Asia and what it means for the United States and its allies.

Tuesday, October 21, 2014 | 8:30 a.m. – 10:00 a.m.
AEI Election Watch 2014: What will happen and why it matters

AEI’s Election Watch is back! Please join us for two sessions of the longest-running election program in Washington, DC. 

Event Registration is Closed
Wednesday, October 22, 2014 | 1:00 p.m. – 2:30 p.m.
What now for the Common Core?

We welcome you to join us at AEI for a discussion of what’s next for the Common Core.

Thursday, October 23, 2014 | 10:00 a.m. – 11:00 a.m.
Brazil’s presidential election: Real challenges, real choices

Please join AEI for a discussion examining each candidate’s platform and prospects for victory and the impact that a possible shift toward free-market policies in Brazil might have on South America as a whole.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.