Posted on Thursday, February 17, 2011
When Congress considers the Obama administration’s proposals to phase out Fannie Mae and Freddie Mac, it needs to keep several goals clearly in mind. It must keep the jittery housing market going and reduce taxpayer risk while enticing private companies back into the mortgage business. And it must keep homeownership affordable to moderate-income and working families.
Fannie and Freddie did not cause the mortgage crisis, despite what critics have since tried to claim. But the two companies have cost taxpayers nearly $150 billion, and counting, by emulating private firms that gorged on faulty loans and mortgage-backed securities. When the bottom fell out in 2008, Fannie and Freddie had to be put into conservatorship, where they remain today.
There is widespread agreement that the two should be wound down. That must be done very carefully. They are currently the biggest players in the market — accounting for more than half of all new mortgages.
The Obama administration has offered three possible approaches. Each envisions a market where the private sector plays the dominant role in providing mortgages. Where they differ is in the government’s role.
The first option, for a system that is virtually all privatized, would result in the highest mortgage rates. It could imperil the availability of traditional, 30-year fixed-rate mortgages, which currently exist only because of federal backing. It would also curtail the government’s ability to mitigate a credit crisis — leaving taxpayers exposed to protracted downturns and possible bailouts.
The second, which involves a partial federal guarantee, raises similar cost and access problems. Theoretically, it would give the government a way to keep credit flowing in a crisis, but it would be difficult to shape a program that is small in good times and expands in bad.
Under the third and most promising option, losses on mortgages and related investments would be covered by capital set aside by banks and insurers or by other private institutions in the mortgage chain. On top of that, the government would provide reinsurance — essentially catastrophic coverage — but only for mortgages that met strict underwriting criteria and at a cost that would cover future claims.
Under this scenario, mortgage rates would be lower than in the other options, but moderate-income communities could still be left behind unless the government monitored lenders to make sure that they got access to credit.
The broken mortgage market needs to be fixed. The challenge is to do it in a way that balances the need for fair and affordable loans with the need to protect taxpayers from dangerous credit bubbles.
THE NEW YORK TIMES