Mortgage Makeover: It’s time to fix Fannie Mae, Freddie Mac
Washington,
August 19, 2013 -
Editorial | August 16, 2013
It’s not often that Republican Rep. Jeb Hensarling of Dallas and President Barack Obama read from the same script. We’re pleased they are doing just that when it comes to clipping the wings of Fannie Mae and Freddie Mac.
Fannie and Freddie were created to make sure that the secondary mortgage market is liquid and that Americans can get affordable home loans. For many years, the system worked. But today, Fannie and Freddie have become liabilities to the entire economy.
They were major causes of the mortgage meltdown that hurled millions of families into foreclosure, left others barely able to stay in their homes and placed taxpayers on the hook for about $200 billion in bailouts. And the risks Freddie and Fannie pose to the economy haven’t lessened; they’ve worsened.
It is time to overhaul these government-backed mortgage operations so taxpayers don’t ever again end up on the hook.
Fannie, Freddie and other government housing programs backed more than 70 percent of the subprime mortgages involved in the 2008 crisis and about half of all new mortgages. Now, under government conservatorship since the meltdown, Fannie and Freddie back fully 85 percent of all new mortgages — considerably more than they backed when the crisis began — and nearly all mortgage securitizations. With so much of the mortgage market in so few hands, it is only a matter of time before history repeats itself with devastating consequences.
Hensarling, who chairs the House Financial Services committee, told this editorial board last week that he wants to wind down over five years both Freddie and Fannie to terminate the government’s historic role in housing financing. President Obama also wants to reform Fannie and Freddie, though he favors a bipartisan Senate measure from Republican Bob Corker of Tennessee and Democrat Mark Warner of Vermont to limit, but not totally terminate, government mortgage guarantees. Both measures are headed in the right direction.
Congress mustn’t let this opportunity slip away as it has done so many times in the past. The Dodd-Frank financial reform legislation passed after the real estate crash was supposed to address Fannie, Freddie and other financial institutions deemed too big to fail. However, lawmakers got cold feet and excluded Fannie and Freddie from the landmark financial reform legislation.
Since the real estate crash, we’ve heard arguments that the economy is still too weak for Congress to make significant reforms, or more nonsensical, that no reforms are necessary. These dangerous, naïve objections do nothing to defuse this ticking time bomb and invite another calamitous real estate bust.
Fannie and Freddie once served a laudable purpose of increasing homeownership but now pose such a serious risk to the economy that the mortgage behemoths as we know them should to fade into history.
Hensarling’s proposal
Rep. Jeb Hensarling, R-Dallas, has proposed the Protecting American Taxpayers and Homeowners Act to end government dominance of the mortgage market. Here are a few key points of his proposal:
- Wind down over five years Fannie Mae and Freddie Mac and end all government guarantees of mortgages.
- Limit taxpayer exposure by lowering the Federal Housing Administration’s maximum insurable loan limit. It had climbed as high as $729,750, a level far greater than the modest income homeowners that the programs were intended to help.
- Implement market reforms to increase mortgage competition, consumer choice and transparency.
- Lower barriers to private investment capital.
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