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Why has Congress left housing to Fannie Mae and Freddie Mac?

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Here’s how strange things have gotten in the world of housing finance. Fannie Mae and Freddie Mac, along with their regulator, are doing more to dismantle themselves than Congress can be bothered to do. Monday their regulator, Ed DeMarco of the Federal Housing Finance Agency, said that a new company will be formed that will do much of the back-office work of both firms, setting the stage for whatever Congress decides to do next to overhaul the mortgage sector.

The two government-sponsored mortgage finance companies are nearing the five-year anniversary of when the feds took them over, a bailout that has cost taxpayers $131 billion so far. They have been vilified, particularly by conservatives, as representing the worst of crony capitalism (fairly) and as being major drivers of the financial crisis (unfairly). For many Republicans, their stated objection to the Dodd-Frank financial reform act (emphasis on stated) was that it didn’t do anything to reform Fannie and Freddie.

And yet nothing. No legislation to overhaul the nation’s mortgage finance has passed either the Republican-led House or the Democratic-led Senate. The White House unveiled a plan for what to do—more than two years ago—that was less a plan than a menu of options from which Congress might choose in sculpting its own approach to reforming the government-sponsored enterprises, or GSEs.

So what is going on here? How is this an area where seemingly everybody agrees there needs to be an overhaul, yet no actual legislative action?

The answer boils down to this: Too many people benefit from the current system, and too many people have something to lose in any overhaul.

Here’s a refresher on the situation, and the problem: In the pre-crisis days, Fannie and Freddie occupied a strange place in the American corporate landscape. They were private companies with shares traded on the New York Stock Exchange, dedicated to maximizing profits for shareholders. Their executives were paid well and they employed scores of lobbyists. But they also had the implicit backing of the U.S. government, ensuring that the millions of home mortgages they packaged were nearly as risk-free as lending to the government itself. Heads, we (Fannie and Freddie shareholders) win. Tails, you (the taxpayer) lose.

That created some bizarre incentives. For ordinary homeowners, it meant lower mortgage rates than they would have had otherwise. For politicians, it meant a steady stream of campaign donations and other support so long as they remained supportive. It meant that it seemed to the government like a free lunch, because there was no annual appropriation to the companies.

Of course it wasn’t free at all, and when the housing market collapsed in 2008, the bill came due for the U.S. government—the aforementioned $131 billion bill, to be precise.

Since then, Fannie Mae and Freddie Mac have existed in a state known as “conservatorship,” which is something like the corporate equivalent of purgatory. They remain for-profit entities. But the U.S. government controls them, is footing the bills for their losses, and their regulator directing almost everything about how they run.

Here’s the thing, though. They have also played a crucial role in the recovery. In 2009, when banks were in horrendous shape and had little ability or desire to make home loans, Fannie and Freddie filled the vacuum, acting as the key providers of funding for the housing sector. It is hard to even imagine how much worse the housing collapse would have been if, when the banking sector was in dire shape, there had been no federal backstop to keep dollars flowing to homebuyers. They now account for 90 percent of the mortgages issued in the United States.

That’s why any serious proposal to reform the GSEs retains some government role in supporting mortgage lending. If legislation to overhaul housing finance stripped out the government role entirely, it would surely lead to a sharp spike in mortgage rates and shortages in the availability of loans, and even after things stabilized would leave the nation more vulnerable to collapses in home prices. More practically, it is hard to see how it could ever pass over vehement objections from all the industries tied to housing—homebuilders, realtors, banks.

In effect, the GSEs have been one of the major ways the U.S. government subsidizes home ownership for generations (the other biggest one is the mortgage interest tax deduction). If lawmakers try to yank away that subsidy, they will face vigorous opposition.

There are any number of ways to do that (Here is an overview of the Obama administration’s three proposed options). Any of them will face opposition from industries that benefit from the status quo. But something will have to change to give the United States a system of housing finance that doesn’t leave taxpayers on the hook for everyone who wants a place to live.

If Congress—both the Republicans who lead the House Financial Services Committee and the Democrats who lead the Senate Banking Committee—would devote as much effort to legislating as they did bemoaning the bailouts that put Fannie and Freddie under government control in the first place, we might even get one.