Like others previously proposed in the Senate, also on a bipartisan basis, the Hensarling-Delaney measure would continue the long-standing policy of government backing for bundling individual mortgages into long-term securities, without which it would probably be impossible for most lenders to offer the middle class a 30-year, fixed-rate home loan. And like the past Senate measures, their bill would do so through a structure designed to overcome the built-in conflicts of interest of the two entities, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation (a.k.a. Fannie Mae and Freddie Mac, respectively), which failed amid the housing price collapse of 2008. They were shareholder-owned, profit-maximizing entities that took risks on the basis of an implicit federal guarantee.
Mr. Hensarling and Mr. Delaney would attempt to make the government’s role more transparent by abolishing Fannie Mae and Freddie Mac in their current forms and giving an existing U.S. agency, the Government National Mortgage Association (GNMA), the power to guarantee mortgage-backed securities directly. Only securities backed by insurance purchased from a qualified private-sector insurer, regulated by the agency that now regulates Fannie Mae and Freddie Mac, would be eligible for the GNMA guarantee, which would cover only catastrophic losses. The idea is to shift more risk to private mortgage insurers at a price that reflects actual market forces rather than bureaucratic fiat.
Lawmakers would be wise to add a mechanism to make these financial entities build up their capital in good times to add another layer of safety, as former top housing regulator James Lockhart has proposed. But the precise details of the plan are less important than the fact that Mr. Hensarling supports it. For him, this represents a retreat from his long-held and, in policy terms, highly defensible position that the government could bow out of the mortgage-backing business completely. There is overwhelming political opposition to that position, however, so Mr. Hensarling has now adopted one that, in his view, at least, would increase the influence of market forces. This, in turn, means that Republicans in the next Congress, whichever party controls it, can engage with Democrats on housing finance reform with the implicit blessing of their party’s strongest advocate of a market-based solution.
Mr. Hensarling’s deal with Mr. Delaney does not guarantee a solution; given the climate in Washington, you would have to bet against the two parties agreeing on something this complex and heavily lobbied. It is, however, a step in the right direction.