Mortgage question: How to replace Fannie Mae and Freddie Mac

Wednesday, December 22, 2010; 8:05 PM

IT'S NOT HARD to start a partisan fight in Washington these days. But if you really want to see the fur fly, just gather a few Republicans and Democrats and get them arguing about how much blame Fannie Mae and Freddie Mac deserve for the 2008 economic collapse. To the GOP, the culpability of the government-sponsored mortgage finance enterprises (GSEs), whose bailout has so far cost taxpayers nearly $150 billion, is self-evident - proof that Washington wrecked capitalism. For Democrats, Republican vilification of Washington-based GSEs, and their mission of affordable public housing, is intended to whitewash the true culprit, Wall Street.

The latest round in this blame game began on Dec. 15, when Republican members of the Financial Crisis Inquiry Commission published an analysis blaming government subsidies for inflating the subprime mortgage bubble - to which liberals responded that Fannie and Freddie had followed, not led, Wall Street into the risky subprime business.

This is not exactly an empty debate. If Republicans can win, score one for their broader free-market views; if Democrats win, it would vindicate government intervention. We are sorry to say, however, that both sides have a point. Fannie and Freddie did not start securitizing and selling large quantities of subprime and other exotic loans until 2007 or so, by which time private-label securitizers had already sowed the seeds of disaster. The mortgage giants did, however, buy hundreds of billions of dollars worth of subprime securities for their own portfolios starting in 2003. Bottom line: Fannie and Freddie did not create the subprime boom, but they enabled it, to enrich their shareholders (and management), and to meet federal affordable-housing goals - which, by the way, had bipartisan support.

But this argument seems especially inopportune now, since whatever happened in the past, there is broad agreement about what should happen in the future: The old "government-sponsored enterprise" model is a proven failure. Fannie and Freddie should be gradually dismantled and replaced with a new system of mortgage finance that does not permit ostensibly private companies to profit from an implicit federal government guarantee. To be sure, there is no consensus between, or within, the two parties as to how much - or how little - government involvement to retain, and how precisely to structure a federal role. But all serious proposals emphasize a greater role for private capital than it currently has.

With some justification, Republicans criticized the Obama administration and Democrats in Congress for failing to overhaul Fannie and Freddie during this year's financial reform legislation. But beyond calling for an end to the bailout, and winding down the GSEs over the next few years, they were vague about what should take the place of companies that, for better or worse, underwrite 90 percent of all new mortgages in America. Now that Republicans have won the House, they have a chance to prove that their concern over the mortgage giants was more than just election-year politics.

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