August 17, 2010
Three years after the housing bubble collapsed, the federal government is still almost single-handedly propping up the home mortgage market, and the Obama administration is beginning to ponder an exit strategy.
Ed Andrews is blogging from today's housing finance summit. Click here to read his posts.
Fannie Mae and Freddie Mac, the giant government-sponsored enterprises involved in mortgage finance, constitute the biggest unaddressed issue left over from the housing bust and subsequent financial crisis. These two entities currently guarantee slightly more than 60 percent of all new home loans. The Federal Housing Administration, which focuses on people with limited incomes, backs up another 30 percent.
It is a situation that almost nobody likes, but one that few have much stomach to change quickly. On the one hand, federal taxpayers are backing more than nine out of 10 new mortgages and are on the hook for more than $5 trillion worth of existing loans. The Treasury Department has already put up more than $160 billion to keep Fannie Mae and Freddie Mac afloat, and the ultimate cost may end up twice that high. If the government put all of those debts on its books, it would significantly worsen the U.S. fiscal picture.
On the other hand, private lenders and investors are staying on the sidelines, either unable or unwilling to put their own capital at risk. A powerful army of interest groups is fighting hard to preserve at least some form of government lifeline, arguing that it's needed to preserve liquidity and credit in the housing market.
That stark dilemma will be on display today when the Obama administration convenes a major conference on the "future of housing.” "The most difficult challenge they have is figuring out the role of government in the mortgage market, and specifically how the government should be present on a permanent basis," said Alec Phillips, a Washington-based analyst for Goldman Sachs.
A Necessary Lifeline?
"We caution that the urge to ‘slay the dragon’
Though some Republican political leaders have proposed shrinking or even abolishing Fannie Mae and Freddie Mac, industry and community groups are rallying to their defense. "Without the benefit of government support, mortgage credit would be less available and would be more expensive," warned Timothy Ryan, president of the Securities Industries and Financial Markets Association, in written comments to the Treasury last month. "We caution that the urge to ‘slay the dragon’ should not cause collateral damage.”
should not cause collateral damage.”
Likewise, the American Bankers Association recently predicted that government guarantees were "the most likely" way to support stability in the mortgage market. And the Independent Community Bankers of America reminded Treasury officials that Fannie Mae and Freddie Mac "kept money flowing" when most other sources of mortgage financing disappeared.
Breeding Ground for Crisis
Fannie and Freddie were created by Congress as hybrids between private for-profit corporations and public institutions to promote the goal of broader home-ownership. They bought up and resold conventional home mortgages, creating a huge national market, attracting big investors and reducing costs for homeowners. Though Fannie and Freddie were never supported by an explicit government guarantee, investors universally assumed that the federal government would stand behind their bonds and viewed them as safe as Treasury bonds. That allowed the two companies to borrow money at lower interest rates than purely private rivals, and the two companies eventually built up huge and highly-leveraged investment portfolios of their own securities.
Both companies were nearly wiped out during the housing bust. With private mortgage investors collapsing en masse, the Treasury under President George W. Bush put Fannie and Freddie into a government "conservatorship” in September 2008 and backed them up with as much money as they needed. Though Bush officials had long wanted to pare back Fannie and Freddie, viewing them as symbols of big government as well as highly risky institutions. Instead, the two companies became even more important because they were virtually the only players still in the mortgage market.
Many analysts have long argued that the government's loan guarantees – whether implicit or explicit – ought to be abolished.
But a growing consensus among industry and community groups is that government backstops are necessary, and that the key is to make sure the government charges an appropriate fee to borrowers. The government already charges fees for its guarantees, but there is much disagreement about whether they are enough to cover taxpayer losses in the case of another housing crisis.
A second core issue is whether Fannie Mae and Freddie Mac should continue to support affordable housing with their mission to provide stability to the mortgage market. Many industry executives, as well as a growing number of Democratic lawmakers and White House officials, argue that this goal should be separated from the companies’ for-profit business in securitizing mortgages. One popular approach would put the Federal Housing Administration entirely in charge of the affordable-housing effort, perhaps subsidized by profits siphoned off from Fannie and Freddie.
Supporters of that approach say it would reconcile a dangerous conflict between for-profit and non-profit objectives. But some community activists worry that it could leave lower-income families out in the cold.
"If the FHA becomes the primary vehicle for housing finance, particularly for blue collar Americans, the finance system will be too exposed to political whims," said John Taylor, president of the National Community Reinvestment Coalition. "We don’t want to end up with a dual-class system in which the government is the only lender for blue collar Americans.”
Just Say No
For many Republicans, the big issue is whether Fannie Mae and Freddie Mac should be allowed to continue at all once the housing market returns to normal. Many Republicans argue that the companies ought to be phased out over the next several years or split into several smaller entities and stripped of any special government privileges. At a minimum, critics of Fannie and Freddie contend that rival companies be allowed to secure the same government guarantees at the same price.
The fight is not likely to be settled any time soon. Even if the Obama administration does propose a plan to scale back Fannie and Freddie, Democrats and much of the housing industry are likely to seek a substantial and continued role for the government. Republicans are likely to fight that tooth and nail.
The Obama administration had originally planned to propose a long-term overhaul by early this year, but it postponed that effort and now hopes to come up with a plan by early 2011.
Fannie-Freddie Bailout: $148 Billion and Counting (Newsweek)
One More Bailout (The Boston Globe)
Housing Crisis Getting Uglier in 2010 (CBS News)