Fannie and Freddie “Restructuring”

Federal National Mortgage Association—Fannie Mae—and Federal Home Loan Mortgage Corporation—Freddie Mac—are at the heart of the US housing industry, since they play a central role in guaranteeing a major fraction of the mortgage loans through which we Americans buy our homes.  They also lie at the heart of the housing bust that was a major cause (albeit not the only one) of the Panic of 2008.  Their role in the bust stems from their decision functionally to waive credit standards and to encourage anyone with two nickels to rub together to borrow to buy a house, whether those borrowers could afford to make the loan payments or not.  And too often Fannie and Freddie waived the two-nickel standard, too.

The mortgage industry cries out for major reform, and now some of that reform might be in the offing.  A plan worked out by Senate Committee on Banking, Housing, and Urban Affairs Chairman Tim Johnson (D, SD) and Committee Ranking Member Mike Crapo (R, ID) and preliminarily agreed by President Barack Obama looks do away entirely with Fannie and Freddie and to replace them with a system of Federally insured “mortgage securities” whose private insurers would be required to take initial losses before any government guarantee would be triggered.

Of course, Senate Majority Leader Harry Reid won’t like the bill because it has Republican fingerprints on it.  House Republicans won’t like the bill, either, since they’re opposed to any government backstop in the private economy.  This isn’t a done deal.

This is, though, a valuable and needed step in the right direction.

There’s no arguing with a tired old man who insists on clinging bitterly to his hatred of all things Republican; Senate Democrats need to lose their fear of him and bypass him on this matter.

On the other hand, the chuckleheads in the House do have a chance to get smarter all on their own.  They’re right to insist that there be no Federal backstop in the housing market, much less in private economy, generally.  However, they also need to understand that this deal isn’t the final step, and that if they hold out for everything all in one fell swoop, they won’t get anything at all.

They should pass this deal, if it gets to them in substantially this form, and then they should begin working on a follow-on bill that withdraws that Federal backstop.  After all, if the free market wants such a thing—in the insurance industry, it’s called reinsurance—a market for mortgage reinsurers will develop.  If such a market doesn’t develop, it’ll be because the free market doesn’t need one.  If the governments of the individual States think such a thing is a good idea for their citizens, they can face their citizens and propose such a thing.  If the citizens of those States demure, then a State government backstop isn’t useful.

Step by step.  Slowly, and so surely.

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