June 17, 2012

IN DUELING campaign speeches last week, President Obama portrayed himself as a defender of the middle class against Republican rival Mitt Romney’s unbridled free-market capitalism; Mr. Romney countered that he would protect ordinary Americans from the statist economics that another Obama term would bring.

This debate over first principles is, to some extent, a welcome development. But unless and until the two candidates get down to specifics, their general rhetoric about government vs. markets won’t be all that helpful.

Consider the matter of U.S. policy on housing finance. For most of the past half-century, both Democrats and Republicans supported a vigorous government role in boosting homeownership, especially through the “government-sponsored enterprises” (GSEs) known as Fannie Mae and Freddie Mac. As we know now, this had a very unhappy ending. The GSEs built multitrillion-dollar balance sheets by guaranteeing residential mortgages — until the housing bubble burst and cast both into a form of pseudo-bankruptcy known as government conservatorship.

Nearly four years after the George W. Bush administration put the GSEs under direct government control, they continue to operate in organizational limbo, drawing on Treasury funding and dominating what’s left of the mortgage finance market even as private capital remains on the sidelines. Today, Fannie, Freddie and other U.S. agencies back $6.3 trillion of the $10.3 trillion in residential mortgages outstanding. This unhealthy and unstable situation must be resolved soon.

Yet Congress and the Obama administration have been unable to agree on a comprehensive new approach — though they have taken one positive step by raising the GSEs’ fees on new mortgage guarantees, so as to create more space in the market for private-sector groups. In February 2011, the administration published a thorough and well-reasoned “white paper” on housing finance that laid out three options for the future: a privatized system; government aid to counteract short-term credit shortages; and government reinsurance for selected mortgage-backed securities. But it did not recommend any particular one. Given the multiple lobbies — from homebuilders to advocates for low-income housing — with a stake in the issue, that was a political bridge too far.

Various proposals are circulating in Congress, including a plan from Sen. Bob Corker (R-Tenn.) to phase out government support to Fannie and Freddie over a decade, at the end of which the mortgage-backed security market would be left to the private sector. Former investment banker and Obama Treasury official Jim Millstein has suggested creating a new federal corporation, modeled on the Federal Deposit Insurance Corp., that would protect investors in qualifying mortgages against catastrophic losses, in return for a fee.

So far, all we’ve heard from Mr. Romney’s camp is a promise to “wind down” the GSEs, details still to come. We’d like to hear a lot more from both him and Mr. Obama. Given the huge size of the GSEs, and given the vital importance of housing to the U.S. economy, it’s not asking too much for the contenders for the next presidency to offer specific plans instead of general principles.

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