Next after Obama signing of financial reform bill: Fannie Mae, Freddie Mac

After signing the financial reform bill, Obama must work to end the corruption inherent in any federal institution designed to boost homeownership. Congress was bought off by the housing industry to lower lending standards, creating the market bubble. Fannie Mae and Freddie Mac need to go.

One triumph for the United States during the 20th century was that it went from being a nation of largely renters to mostly homeowners. The American dream was made real in picket fences and title deeds.

The 21st century may look very different, however, once President Obama decides whether taxpayers should continue to support private home purchases – knowing in hindsight how far the housing market has collapsed since 2007 while leaving government with more than $400 billion in debt. That red ink is mainly due to a federal takeover of mortgage giants Fannie Mae and Freddie Mac, the great enablers of the home-buying binge.

So far Mr. Obama has put off the issue of whether to reduce the federal role in buying a home, preferring instead to wait until the home market further stabilizes and his Treasury Department devises reforms for Fannie and Freddie. In the meantime, he signed legislation Wednesday aimed at reforming other areas of the financial system – but not the public mortgage system.

Americans must be on guard to prevent government from again creating another housing bubble. This last one burst with little warning, polluting the economy with “toxic” mortgages that spread like the BP oil spill on the Gulf of Mexico.

They must also be wary of again letting government essentially run a business. Both Fannie and Freddie were created by Congress, given implied guarantees of government backing, and then quotas for selling of mortgages. The result was political bribery by the housing industry to lawmakers in the form of campaign contributions – and more. One mortgage company, Countrywide Financial Corporation, gave discount loans to some key members of Congress and to 153 employees of Fannie Mae.

The need for Fannie and Freddie to help low-income Americans is over. They were created by Congress decades ago as profitmaking hedge funds to build up an investment market for the buying and selling of mortgages in bundles. But financial markets are now big enough to take on most of that complex role, allowing government to phase out the two institutions.

For the sake of remaking the US economy, Obama should endorse new and better incentives that entice Americans to put their savings into industries that can compete in global markets.

Federal incentives for homeownership, while creating jobs in that industry, create an artificial market prone to political meddling by lawmakers on the take from the housing lobby. And, now we learn all too late, homeownership may not create long-term wealth or retirement kitties. Long-term wealth lies in competitive export industries and services.

Plenty of smart economists are now devising clever schemes for Fannie-lite institutions, claiming safeguards against previous pitfalls. The Treasury Department is due to recommend its reforms to Congress in a few months.

But any federal institution charged to subsidize homeownership will be prone to political pressures in Congress to lower lending standards so that more people can buy homes. The cycle toward a housing collapse would begin again. And money that might have gone to more productive industries and services would have been wasted.

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