by Mitch Kokai
Senior Political Analyst, John Locke Foundation
The recent housing crisis convinced many people that Fannie Mae and Freddie Mac caused too many problems to be allowed to continue in their current structure. But as Jim McTague explains in his latest Barron’s “D.C. Current” column, not much has happened to address the problem.
If the hedge-fund industry owns a congressman, then that congressman owes his paymasters an apology. The funds are getting nowhere on Capitol Hill in their Quixotic quest to have the government turn loose Fannie Mae and Freddie Mac as private-sector companies with no government backing. In fact, two recent proposals—a House “discussion draft” and a bipartisan Senate bill—call for a controlled disintegration of the discredited mortgage-guarantee companies and the creation of a private secondary mortgage marketplace. They aren’t moving very fast, either. …
… THE DISCUSSION DRAFT IS THE WORK of Texas Republican Rep. Jeb Hensarling, chairman of the House Financial Services Committee. Conservatives love the Hensarling document because in addition to deep-sixing Fannie Mae and Freddie Mac, the former playthings of morally suspect politicians, it significantly narrows the federal role in the mortgage market. Politicians never can resist pressuring bureaucrats into watering down underwriting standards on government-guaranteed mortgages, so that more of their constituents can benefit. This includes constituents who are unable to afford a house, regardless of the terms. Peter Wallison, a research fellow at the American Enterprise Institute, notes that the down payments on FHA-backed loans over the years declined from 20% to 3%. Now, the Federal Housing Administration requires a taxpayer bailout, he says.
The bipartisan Senate bill, the work of Virginia Democrat Mark Warner and Tennessee Republican Bob Corker, also eliminates Fannie Mae and Freddie Mac. It would create a Federal Mortgage Insurance Corp. to insure 90% of a loan in the event of a housing “catastrophe” like a superstorm or financial crisis.
The real-estate and mortgage industries love the Senate bill because the guarantee would make it easier to sell mortgages into the secondary market in good times and in bad. Those guarantees, according to conservatives, would serve as the seed corn of a future housing catastrophe by causing excess credit to flow into residential real estate.
Economists believe a resolution to the Fannie-Freddie problems is essential for a full housing recovery. On Thursday, Federal Reserve Chairman Ben Bernanke told the Senate Banking Committee, “It’s time to do this.” It’s unlikely, however, that reform will occur while Congress remains divided. Hensarling’s draft is too conservative for the Senate, and the Senate bill is too liberal for the House. So hedge funds have until 2015 to buy a congressman.