New legislation proposed by a bipartisan consortium in the U.S. Senate purports to bring an end to Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac, the two mortgage giants at the center of the financial meltdown that brought the global economy to its knees in 2008.
The bill will wind down $5 trillion of Fannie and Freddie assets over a period of five years and abolish the Federal Housing Finance Agency that currently oversees the conservatorship. It eliminates the enterprises’ affordable housing goals that by 2008 required the GSEs to make more than half of its loans to those below the median income level.
These low-income loans were at the center of the crisis as the economy turned downward, unemployment rose, and the foreclosures soared to the millions. The legislation thankfully brings an end to this practice.
But it does not eliminate the government guarantee of mortgage loans. It establishes a Federal Mortgage Insurance Corporation (FMIC), not unlike the Federal Deposit Insurance Corporation, to “collect insurance premiums and maintain a deposit fund on all outstanding obligations. The FMIC will provide backstop insurance that will only kick in after a substantial amount of private capital is exhausted,” according to a Senate Banking Committee fact sheet.
Like it or not, that’s a guarantee, although the bill promises it’s all supposed to only be temporary: “After year eight, the GAO will issue a study on the feasibility of a fully privatized market. Six months later, Congress will consider recommendations to wind down the FMIC entirely. The FMIC, including its [Office of Inspector General], will present reports to Congress annually outlining a reasonable plan to increase private market participation.”
So only in 2021 will Congress even consider eliminating the taxpayer guarantee on mortgage risk. And only then consider a plan to privatize the mortgage industry.
But it is hardly mandatory. The implicit government guarantee that once existed in the public-private model will now simply be explicit under the new model. The legislation simply puts off real reform for a later date — in the meantime merely rearranging furniture.
Fannie and Freddie in their heyday were privately funded too as publicly traded stocks. They had insufficient capital however to back up their risky lending and taxpayers wound up on the hook when the billions of losses could not be sustained.
It is hard to imagine, then, how it will be any different under the new system.
Although the higher risk loans do not appear to be included in the FMIC mix the reality is they are just being passed off to the Federal Housing Administration (FHA) that has expanded in a few short years since 2009 from a small fraction of the housing market to now over $1.1 trillion in loan guarantees outstanding.
A text search of the Senate legislation reveals that it does not even touch the FHA’s chancy loan portfolio. The agency is not even mentioned.
This hardly breeds confidence that the past sins of taxpayer government guarantees on risky mortgages are being fully addressed. Instead, it appears they are just being swept under the rug and transferred to new management.
Meet the new boss, same as the old boss.
Robert Romano is the Senior Editor of Americans for Limited Government.
