Yet their future has been unsettled since September 2008, when their regulator, the Federal Housing Finance Agency (FHFA), seized control of them and declared them unable to withstand the housing market crash without an infusion of taxpayer funds. And that infusion has been massive: $187.5 billion.
As intended, the bailout, or “conservatorship,” as it’s formally known, prevented a collapse that could have reverberated around the world, where investors — including the central banks of China, Japan and other major nations — hold hundreds of billions of dollars’ worth of GSE securities.
But even though it has lasted 52 months — and counting — FHFA’s conservatorship was never meant to be permanent. As long as they’re in limbo, the GSEs can’t truly plan a strategy, and their employee morale will suffer. Above all, the housing market will remain too uncertain for the kind of private-sector commitments upon which housing’s full recovery depends.
In recent years the GSEs have been a bone of partisan contention. Democrats generally supported them as a positive legacy of the New Deal and Great Society that helped promote homeownership and build the middle class. Republicans decried them as corporate welfare for the housing industry.
Neither side was free of self-interest: Democrats milked the GSEs to fund projects backed by their various constituencies; the GOP critique echoed that of Wall Street, which was encroaching on the GSEs’ mortgagesecuritization business.
Nor should one exaggerate the partisan divide. At various times, politicians from both parties engaged in boosterism about the “American dream” and used the GSEs to advance it. Both responded to real estate agents, mortgage bankers and other hometown interests. As the saying goes, there’s housing in every congressional district.
Still, experience mostly vindicates the GSEs’ critics. Profit-motivated private investors owned stock in the GSEs; managers pursued shareholder profits with a funding advantage based on the implicit, but real, taxpayer guarantee. This encouraged Fannie and Freddie to take on excessive risk, with disastrous results — not only the direct cost of the bailout but also the broader indirect costs of over-investment in single-family housing.
I never quite grasped the liberal love affair with these giant, politically connected financial corporations and their highly paid executives. Yes, benefits trickled down, in the form of higher homeownership rates. But after a point, these gains were unsustainable, as the crash proved.
To its credit, the Obama administration has identified the GSEs’ “structural design flaws, combined with failures in management,” as “the primary cause of their collapse” — as a Treasury Department report put it in 2011. The administration argued that reform should avoid re-creating the GSEs’ public-private conflict.
Yet while the administration outlined several reform options, it did not push for any of them. (Republicans have floated plans with equal futility.) Meanwhile, the administration pressured FHFA to manipulate GSE finances in favor of underwater homeowners — ostensibly to free up cash for consumer spending and short-term economic growth.
Edward F. DeMarco, acting director of the FHFA, justifiably resisted using the GSEs yet again as an off-budget cash cow. His reward was extravagant vilification from progressives, who launched an election-year Internet campaign blaming him for the sour economy and demanding his firing.
The GSEs are shrinking gradually, as well as stabilizing. With administration support, they raised fees to securitize loans, and DeMarco recently agreed with Treasury on modifications to the bailout that will help slim the GSEs even faster.
The time is ripe for a conclusive fix. Is that too much to hope for? Despite the partisan wrangling and interest-group lobbying — not to mention legitimate policy disagreements — basic principles of a new mortgage finance system are widely agreed upon. There should be no more confusion of public mission and private profit; government support, if any, should be transparent and limited to the truly needy.
The American dream of homeownership is a good thing. Alas, we’ve been trying to have too much of it.