Housing loans made sensible

Saturday, February 12, 2011; 6:34 PM

ANYONE WHO still thinks that President Obama is a "socialist" hasn't read the 31-page white paper on housing finance his administration released Friday.

The document's market-based approach emerges on the very first page: The government's "primary role should be limited to robust oversight and consumer protection, targeted assistance for low- and moderate-income homeowners and renters, and carefully designed support for market stability and crisis response." It says that a gradual shutdown of Fannie Mae and Freddie Mac, the failed government-sponsored mortgage securitization entities, will begin this fall, with a reduction in the size of loans they are permitted to guarantee. Within a matter of years, they will disappear altogether. Given past Democratic support for Fannie and Freddie, the fact that a Democratic administration emphatically supports their gradual elimination and a smaller government role for the future shows that Mr. Obama's team has considered the issues pragmatically and objectively and - crucially - resisted pressure from housing lobbies that want to preserve a much larger role for government.

In our view, the best replacement for Fannie Mae and Freddie Mac would be a private system for mortgage securitization. There is no principled reason why government should insulate housing, alone among all market sectors, from the business cycle. Privatization would entail some risk to household wealth, it's true. Yet homeownership rates are still high in some countries that do not have government-sponsored mortgage securitization. And if government doesn't steer capital into housing, the capital doesn't disappear; it could fund other job-creating businesses. The administration, to be sure, does not adopt our position. But it does describe it as one of three viable options, the others of which would have government support a more or less limited amount of mortgage liquidity by selling reinsurance for mortgage-backed securities issued by the private sector.

Among the best parts of the admirable report is its treatment of the Federal Housing Administration. The FHA, whose traditional role has been to insure mortgages to creditworthy low-income home buyers, has expanded far into the middle-class market during the crisis. Noting that Fannie and Freddie's past efforts to encourage affordable housing were "inefficient and ineffective," the administration wisely recommends pursuing that goal primarily through the FHA, whose subsidies are finite and transparent - while reforming the agency to reduce risks to taxpayers. That would require legislation empowering the agency to adjust its underwriting standards without prior congressional approval. Yet the report also calls for a gradual shrinkage in the size of loans the FHA supports, which has been inflated by the crisis to a maximum of almost $730,000. There's no contradiction here, because the agency's core mission of aiding disadvantaged home buyers is compatible with a substantial reduction in loan size. Ninety-five percent of minorities who borrowed through the FHA took out mortgages of $300,000 or less, according to a recent study by George Washington University professors.

From now on, it appears that the debate over the nation's system of housing finance will be between Republicans pushing for broad privatization and Democrats pushing for somewhat more limited privatization. That is a hugely positive development.


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