Bye-bye Fannie and Freddie, but hello to what?
Mortgage giants Fannie Mae and Freddie Mac are draining taxpayers and face extinction. Obama is due to present reforms in housing policy by January. One consensus: more help for renters.
In four months, President Obama must propose to Congress a new vision for federal support of housing. Sounds a bit boring, true, except that this will be a multitrillion-dollar decision. Even as the vision takes shape, it is seen as critical to the economic recovery.
Time is short because Washington has been spending millions each day to prop up the giants of the mortgage industry, Fannie Mae and Freddie Mac, which are the main focus of the coming reform.
These once-regulated-only enterprises became fully government owned during the 2008 financial crisis. So far they have cost taxpayers at least $150 billion – with more red ink to come as home foreclosures rise.
The first inkling of the Obama vision was made public Tuesday at a forum of experts led by Treasury Secretary Timothy Geithner. The ideas discussed by Mr. Geithner and others, such as Shaun Donovan, secretary of the Department of Housing and Urban Development, reveal fresh thinking about a huge problem.
Replacing Fannie and Freddie with an entity that can still lubricate Wall Street’s trading of mortgages but is less risky to taxpayers was the main topic. The experts did largely agree, as Mr. Donovan put it, that the “government footprint in the housing market needs to be smaller.” (The government now guarantees 90 percent of new home loans.)
One surprising consensus was the idea of downplaying federal support of home ownership in favor of rental housing. Washington spends about $4 per person to subsidize home ownership – mainly through tax benefits – compared with only $1 per person on affordable rents – mainly through direct federal spending. This is a lopsided priority.
There are three reasons to support a shift toward more federal support of renters:
One, home ownership may not be the best investment vehicle after this ongoing housing collapse. Potential buyers, having seen a 30 percent drop in home prices, are wary of viewing a house as a retirement kitty or as potential equity to tap for cash. Enticing the poor to take on expensive mortgages is no longer a sure-fire way to close America’s wealth gap.
Two, the US economy would be more innovative and competitive if Americans were more flexible about moving to new jobs, as Secretary Donovan indicates. Renters can more easily to do that, especially at a time when many homeowners are stuck with mortgages worth more than their houses.
Three, the government’s proven tendency to make it easier over time to obtain a mortgage could run amok again – as it did with lenient lending standards, such as “liar loans” requiring no down payment. “There are people in this society who, for economic and frankly social reasons, can’t and shouldn’t be homeowners,” Rep. Barney Frank, chairman of the House Financial Services Committee, told Fox News. Renting may, indeed, be the best option for many low-income Americans.
Federal promotion of home ownership now costs about $230 billion a year, a figure that will likely be reduced if Congress can achieve bipartisan housing reform next year. Lawmakers should look to other countries, such as Canada, that are able to keep the hand of government small in the housing industry.
Between them, Fannie and Freddie hold a portfolio of mortgages worth $1.6 trillion, with few resources available to cover any losses. This is a precarious predicament for taxpayers. The stakes in reform of these giants are high for current homeowners, who need a stable housing market. And the reform is a test for Washington in its role as a backstop for a mortgage market that is the second largest securities market in the world.
A start has now been made to find a consensus on a new housing policy. As wide agreement as possible is essential if the US is to avoid a repeat of the ongoing housing collapse.