Structural redesign

Monday, October 25, 2010

THE FEDERAL regulator in charge of Fannie Mae and Freddie Mac has released staggering new estimates for the ongoing bailout of the mortgage-guarantee giants. In the likeliest scenario -- housing prices and the economy muddle along more or less as they are now -- the taxpayer will take a net hit of $154 billion. If we're lucky and the housing market perks up sooner, the net cost could be a tad lower: $141 billion. If a double-dip recession strikes, the price tag shoots up to $259 billion. Warning: None of these scenarios factors in the imbroglio over allegedly defective foreclosure documents.

The report is a reminder of how much damage government has done through a well-intentioned but ill-designed attempt to prop up homeownership. The cost in taxpayer dollars is relatively easy to measure. In a wider but less quantifiable sense, government encouragement of overinvestment in housing has done deep, structural damage to the U.S. economy, by distorting patterns of employment, land use, energy consumption and infrastructure development. The cumulative inefficiencies could take many years to unravel.

Developers, builders, real estate agents and advocates of low-income housing may plead their various cases for more and more subsidy. But America is overbuilt. In the second quarter of 2010, 10.6 percent of all apartments and 2.5 percent of houses stood empty, according to Census Bureau statistics. Both rates are roughly double what they were 30 years ago.

Still, the latest Fan-Fred bailout estimates qualify as good news, of a sort. First, if the likeliest scenario pans out, then almost nine-tenths of the entities' losses are behind us. That's because Fannie and Freddie have tightened underwriting standards since being taken over by the government, and, barring a steep downturn in the market, newer loans are less likely to default than the ones in their older book of business. Second, even in the worst-case scenario, losses would come under the $400 billion ceiling the Obama administration lifted last year lest it ultimately prove inadequate. In short, there is some light at the end of this tunnel.

Drawing a line under Fannie and Freddie's past may also help spur the administration and Congress to devise a permanent housing-finance fix. Republicans predictably condemned the lack of a Fannie-Freddie overhaul in the financial regulation reform bill that President Obama signed this year, but the administration and its Democratic allies on Capitol Hill defensibly insisted that the middle of a housing meltdown was not the best time for that. There is, however, no excuse for not acting before the current bailout's legal authority expires at the end of 2012. Housing finance reform is indispensable to the broader restructuring of the U.S. economy.

The likelihood that the mortgage giants' Republican critics will control the next House of Representatives may set up a further partisan clash with the Democratic administration -- but it may not. Election-year rhetoric has obscured the fact that there is a good deal of bipartisan agreement on certain principles: no repeat of the public-purpose, private-profit model that undid Fannie and Freddie; an end to implicit government guarantees for mortgage-backed securities; and separating federal support for low-income housing from mortgage finance. Both parties seem to have learned the overriding lesson of the Fannie-Freddie disaster -- government efforts to expand homeownership have become unsustainable and should be dialed back. Now the president and the next Congress must apply that lesson. The U.S. economy's ability to grow depends on it.

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