In America we rarely declare "victory" over a problem. Once an issue becomes a target of collective concern, it stays on the political landscape, even if substantial progress occurs. Congressional committees, interest groups, government agencies and journalists all acquire a stake in "attacking" the problem. Everyone embraces the rhetoric of social improvement. A case in point is homeownership -- a widely supported goal that now symbolizes the American Dream.
At last count about 69 percent of U.S. households owned their homes, up from 55 percent in 1950. You might wonder: How much higher can, or should, this go?
Millions of young Americans are too footloose to want a home. Some older Americans are too feeble to handle a home. Some people prefer to rent. In many big cities, renting dominates (in New York state, homeownership is only 54 percent). Among minorities, homeownership lags; still, there have been improvements. The rate is 49 percent among blacks (up from 43 percent in 1991) and 48 percent among Hispanics (up from 39 percent). The remaining obstacles involve poverty more than flaws in the housing market.
All this serves as useful background to the controversy surrounding Fannie Mae, the nation's largest mortgage company. If you've paid attention, you know that chief executive Franklin Raines and chief financial officer Timothy Howard left the company after two federal agencies accused Fannie Mae of improper accounting to the tune of $9 billion in unrecorded losses. In 2003 a similar accounting controversy engulfed Freddie Mac, another huge mortgage company.
The temptation is to treat these incidents as further examples of executive bad behavior -- while also defending Fannie and Freddie's critical role for housing. This is exactly the wrong response: It favors a false problem (homeownership) over a real one (a possible failure of Fannie or Freddie).
These are not ordinary companies. Most corporations are chartered by states. By contrast, Congress created Fannie and Freddie. It gave them dual missions: to aid housing by providing mortgage credit, and to make money for shareholders. In financial markets, both Fannie and Freddie are seen as quasi-government agencies. Their debt enjoys low interest rates just above Treasury rates. A default by either would be considered a government default -- a crisis. The result is a potential disaster for taxpayers: It's a heads-I-win-tails-you-lose proposition. If Fannie and Freddie prosper, benefits go to shareholders; if there's trouble, government will almost certainly rescue them.
Congress ought to end this peculiar situation, because a bailout could be massively expensive. One way or another, Fannie and Freddie support about 60 percent of the conventional mortgages that by law they can handle (these are loans up to $359,650 in 2005). That's about $3.8 trillion in mortgages. Some they own outright. They borrow and use the funds to buy mortgages. Fannie and Freddie's debt now totals about $1.7 trillion. The other mortgages they insure; they provide guarantees (for a fee) to other lenders that homeowners will make their monthly payments.
Until recently Fannie and Freddie argued that they were well-run firms in a safe business (meaning that most homeowners pay). The accounting controversies shatter these assurances. The details are less important than the fact that surprises occurred. Raines and Howard claim they fell victim to honest disagreements over complex accounting questions. Critics say they took liberties with the rules. Either way, the business is riskier than advertised. Because profits were overstated, Fannie is now short of required capital by an estimated $9 billion or more.
Against this backdrop, Congress should rush to end Fannie and Freddie's special status -- and the danger of a bailout. Attorney Tom Stanton, a critic of the companies, has proposed a plan that would make them ordinary firms (chartered by states) and phase out their existing federally backed business. With their new corporate status, they could still supply mortgage credit. But they would borrow on less favorable terms, and they'd probably require more underlying capital. Mortgage rates might rise slightly, but the housing market wouldn't be starved for money, because there are other willing lenders: banks, insurance companies, pension funds.
Unfortunately, Congress will probably shun anything like this. It might try to toughen regulation of Fannie and Freddie. But this wouldn't eliminate the danger of a bailout.
Blame this obtuseness on the staying power of familiar crusades. Homeownership is a noble cause, and, in massive ad campaigns, Fannie and Freddie portray themselves as the primary engines of spreading the American Dream.
Well, homeownership isn't a big problem, and Fannie and Freddie have been minor -- not major -- forces in past increases. The others include rising incomes, falling interest rates, low-down-payment mortgages (as little as 3 percent) from the Federal Housing Administration, the tax deductibility of mortgage interest payments and government programs to help first-time buyers. But Congress clings to old mythology. Heeding yesterday's problem, it may cause tomorrow's.