The federal government took over Fannie Mae and Freddie Mac way back in 2008, and here's what Congress has done since then to put the housing finance system on firmer ground: Nothing. To make matters worse, the mortgage agencies have recently become astoundingly profitable, weakening political enthusiasm for reform even further.
If the status quo continues, the consequences aren't pretty. Right now, the federal government is backing most of the mortgages in the country, and would take a huge hit if the housing market were to collapse again. Also, people who can't qualify under the government's lending parameters have a hard time finding private financing. Finally an effectively nationalized system is a terrible environment for innovation, which -- though it got a bad name during the last crisis -- is why it is important to maintain some flexibility in the marketplace.
So far, the debate has largely ricocheted back and forth between two ideological extremes: Making the status quo permanent by enshrining government control of Fannie and Freddie; and privatizing the mortgage market entirely. On Wednesday, though, some think tankers came out with a hybrid system that would do four basic things:
- Wind down Fannie and Freddie, like President Obama called for back in 2011.
- Create an entity called the Federal Mortgage Insurance Corporation, modeled on the Federal Deposit Insurance Corporation for the banking system, which would regulate mortgage-backed securities and insure them against catastrophic losses.
- Allow private lenders to originate and own the underlying mortgages and securities, putting a "first-loss" layer of private capital between borrowers and the government.
- Create a "market access fund," supplied by fees on mortgage backed securities, to provide $5 billion per year in credit enhancement and direct subsidies for lower-income buyers -- making good on the promise of the National Housing Trust Fund that was created in 2008 and never capitalized.
"I think we all understand there will be government intervention in the next crisis. This is the reality," said Phil Swagel, a University of Maryland professor who co-authored the report along with the Urban and Milken Institutes and Moody's Analytics chief economist Mark Zandi. "A system that is notionally private would inadvertently recreate the worst aspect of the old system, which is the implicit guarantee. I'd rather have the government role explicit, price it, compensate taxpayers, and understand that we have a system that's stable, that meets the goals of access to mortgages for creditworthy borrowers, increases the role of the private sector, and protects taxpayers, the financial sector, and the economy."
The writers are pretty confident it'll work.
"You got a fortress mortgage finance system, man, this thing's going to be rock solid, nothing's going to blow it away," Zandi said, on a conference call with reporters. "It's never ever again in our lifetimes, my children's lifetimes, my grand children's lifetimes, going to be a problem."
As it happens, a bipartisan group in the Senate appears to be cooking up something similar. A couple weeks ago, Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.) released the broad outlines of a bill that mirrors some of the think tanks' proposals, including the Federal Mortgage Insurance Corporation, an increased role for private lenders, and a common securities platform. When asked about their opinions of the draft legislation, the think tankers couldn't come up with substantive ways in which it differed from their own proposal, saying there's a "growing intellectual consensus" around this type of approach.
The question, of course, is whether it'll gather enough momentum to move forward -- the White House hasn't shown much interest since Treasury's report back in 2011. "The administration has been missing in action on this," Swagel said. "So that's an important element."