Senate fails to give Fannie and Freddie reform deadline

Saturday, May 15, 2010

WHETHER IT WAS a sincere effort at financial reform or a mere exercise in election-year point-scoring, the Republican-sponsored amendment to add a slow wind down of mortgage giants Fannie Mae and Freddie Mac to the Senate's financial reform bill has now died its expected death. It went down on a party line vote Tuesday, with 56 Democratic votes against -- though it's worth noting that support for the bill was actually bipartisan, in that Democrats Evan Bayh (Ind.) and Russell Feingold (Wis.) voted yes. And so the two enterprises will continue operating, and losing money, without the 24-month deadline to shut down that the bill would have imposed on them. The Treasury will continue bailing them out, with the tab currently at $150 billion and rising.

This is probably for the best, alas. The fragile mortgage market remains dependent on Fannie and Freddie's backing, and the bill was too vague about who or what would provide liquidity after they were gone. Tearing down these two behemoths would accomplish only half the job of housing policy reform; Congress must also build something new or clearly provide for someone else to do it. It's a mammoth and dizzyingly complex task that must be gotten right, and for that reason, it can wait for the less-divided attention of a fresh Congress.

Still, to read the Republican bill's main provisions is to be reminded of many of the errors built into the old "government-sponsored" structure -- disastrous design flaws that the federal government's housing policy must never repeat. Among these were weak capital standards; an exemption from normal registration by the Securities and Exchange Commission; and the affordable-housing-goals mandate, which, in the name of helping the disadvantaged, forced Fannie and Freddie to take on far too much credit risk.

There is one provision of the Republican bill that could be passed on its own without dramatically upsetting the housing market: repeal of the recent increases in the size of loans that Fannie and Freddie can securitize, and the return of the "conforming loan limit" to its old level of $417,000. The subsidy to buyers and sellers of expensive houses was supposed to be temporary, but has been unwisely extended in the name of propping up the real-estate market. Now that the market is healing, however tentatively, there is even less justification for imposing this extra risk on taxpayers.

If nothing else, the Republicans' failed amendment kept the heat on a vital issue. With some lobbies that benefited from the old system already trying to re-create as much of it as they can, the more attention paid to the costs of the Fannie-Freddie implosion, the better.

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