Why Ryan Wants to Dump Fannie and Freddie
Life + Money

Why Ryan Wants to Dump Fannie and Freddie

REUTERS/Jason Reed

Medicare isn’t the only major federal program targeted for a dramatic revamp by GOP vice presidential candidate Paul Ryan—who also wants to severe the government’s relationship with the troubled mortgage giants Fannie Mae and Freddie Mac.

The Wisconsin congressman proposed in his budget “the eventual elimination” of both companies whose four-year long conservatorship—at a cost of more than $140 billion to taxpayers—has stopped the housing market from plunging even deeper into the economic abyss.

The implicit promise of a federal bailout led to reckless actions by the two government-chartered firms with a combined $5 trillion of housing debt on their books, the House Budget Committee chairman argues.
“It’s the poster child for what I call crony capitalism,” Ryan told the talk show host Glenn Beck last year
“We’re going to get the private sector to do the secondary mortgage market, not the government. We’re going to put private capital at risk for securing mortgages, not taxpayer capital.”

That stance reflects a divide between Ryan’s belief in small government and the construction industry that has been central in the life of his extended family. His great-grandfather started Ryan Inc., one of the country’s premier contractors for housing developments, commercial sites, and golf courses and briefly the congressman’s employer before first running for Congress in 1998.

Adam Ryan, president of Ryan Inc., told The Fiscal Times that he’s “extremely proud” of his cousin, but “We are very non-political…We have no opinion on Freddie or Fannie.” Others attached to the housing sector have serious reservations about the congressman’s intentions.
Winding down Fannie and Freddie would place housing—about 20 percent of the economy—in jeopardy, according housing trade associations and progressive think tanks that favor reducing but not eradicating the government’s role.

“You’re pretty much giving it a fatal blow,” said John Griffith, a policy analyst for the progressive Center for American Progress. “There is no indication that there is enough private capital to go into the mortgage market without a government guarantee.”

With homeowners across the country still suffering from the fallout of the sub-prime crisis, the issue also presents a stark contrast with President Obama, who has pushed unsuccessfully for the government to refinance mortgages at lower rates.

The Treasury Department proposed in a white paper last year three potential avenues for reforming the government’s role in housing finance: end the mortgage guarantee for Fannie and Freddie; create a backstop to stabilize the market in times of stress, or, establish a form of reinsurance for certain mortgages.

Mitt Romney, the presumptive Republican presidential nominee, does not include housing in his campaign’s 59-point economic plan. He says the government should allow the market to bottom out, and that Fannie and Freddie have worsened the situation.

“Are they a problem today? Absolutely,” he said in a January primary debate. “They’re offering mortgages again to people who can’t possibly repay them. We’re creating another housing bubble.”

Ryan is one of 80 co-sponsors of a bill introduced by Rep. Jeb Hensarling, R-Texas, that would end the government conservatorship in two years, and repeal Fannie and Freddie’s mandate to establish affordable housing goals.

The measure has been stuck in the House Financial Services Committee since last year, as many lawmakers say that some type of federal support should continue. The fragile housing sector is only just now showing signs of a recovery, with economists and market indices suggesting that prices have reached their trough and are on the verge of climbing upward again. Fannie and Freddie both reported this month that they had net profits in the second quarter of this year.

Scott Meyer, assistant vice president for government affairs at the National Association of Home Builders, said the committee is still sorting out the future of both companies and that some type of government presence needs to be continued.

“Since they’re providing most of the liquidity in the mortgage market, it would be very dire right now [without them],” he said. “Should there be another downturn in the future, you want to have a government backstop in place.”

The battle over Fannie and Freddie has largely played out in congressional committee hearings and the corridors of their regulators and the Treasury Department thus far. But Ryan’s addition to the Republican ticket could transform it into one of the major economic debates ahead of November.

Just like his plan to transform Medicare into a voucher-type program, Ryan’s plan to pull the government out of the mortgage sector becomes part of the larger debate going into November about what the responsibilities of the government should be.

And just as Ryan’s laser-like focus on curbing the size of government energizes the Republican base, it could lead to a barrage of criticism from Democrats.

“As the election season wears on, it’s just too big of a thing to ignore,” said Jason Gold, a senior fellow at the Progressive Policy Institute. “You’ll see the administration putting housing out there, because there’s such a void in Romney’s policies.”