Would Republicans use Fannie and Freddie to fix the housing crisis?

at 11:02 AM ET, 01/27/2012

During last night’s Republican debate in Florida, Wolf Blitzer asked the candidates to offer their thoughts on the country’s foreclosure crisis: “How would you phase out Fannie Mae and Freddie Mac? Does the private mortgage industry need additional regulation?” Most of the candidates focused on the housing giants as the cause of the housing bust. But they didn’t say whether the big government-sponsored housing giants could be part of the solution to the ongoing crisis.
(AP )

The candidates largely focused on the past: Mitt Romney attacked Fannie and Freddie for being “a big part of why we have the housing crisis in the nation that we have,” then immediately used the issue to attack Gingrich for his ties to Freddie Mac, without indication of how he’d personally handle the housing giants going forward. Rick Santorum and Ron Paul both claimed to have raised pre-crisis warnings about Fannie and Freddie but didn’t directly tackle the question of how they’d deal with the two entities in the context of the current crisis.

Gingrich, at least, offered a straight-forward answer to Blitzer’s original question, proposing to break up Fannie and Freddie into smaller pieces and phase them out gradually “over a five-year period.” In fact, the Obama administration has backed this general idea as well, recognizing that holding cheap mortgages through Fannie and Freddie exposed taxpayers (and the housing market) to too much risk. About a year ago, Treasury laid out a proposal to unwind the housing giants gradually by reducing the pool of qualified borrowers, limiting insurance to times of crisis only or otherwise tightening criteria for underwriting. At this point, the main difference between the White House and Republicans on the issue is not whether to unwind Fannie and Freddie, but how quickly it should be done.

But ultimately, dismantling government support for Fannie and Freddie is mostly intended as a step to prevent the next housing crisis, not to solve the current one. That’s why the pendulum has now swung in the opposite direction as the housing market has continue to remain underwater. Rather than tightening up the criteria for underwriting mortgages through Fannie and Freddie — perhaps a first step in a phase-out — there’s a push to go in the opposite direction in order to give housing a jump-start. In his State of the Union address, Obama suggested that he’d support mass refinancing of mortgages — in part by going through Fannie and Freddie — building off a proposal that Romney’s economic adviser Glenn Hubbard originally put forward.

The biggest controversy, then, is not over whether Fannie and Freddie should exist in the long term, but whether they should be used to solve the current housing crisis. Romney, for instance, has recently softened his position on housing and left the door open for government involvement to support homeowners, but he still hasn’t provided a solid answer to whether he’d back Hubbard’s plan. To get a better sense of the GOP candidates’ stance on housing, that would have been a better question to put forward.

 
Read what others are saying

    Most Read: Business

    DJIA
    0.11%
    S&P 500
    0.33%
    NASDAQ
    0.50%
     Last Update: 06:12 PM 08/30/2014

    World Markets from      

     

    Other Market Data from      

     

    Key Rates from