Let's End the Fannie & Freddie Monopoly
Five years ago, Fannie Mae and Freddie Mac were on the hot seat—and they deserved to be there. Faulty business practices, unwise public polices and weak regulation led to Fannie and Freddie's collapse during the housing crisis. Congress stepped in with a bailout and taxpayers were put at risk.
If you ask Americans if the federal government should own the airline or railroad industries, they would say no. Taxpayers have a deep-seated belief in private markets and competition.
Yet today, many Americans—and perhaps even some members of Congress—would likely be surprised to learn our federal government is effectively responsible for nearly the entire housing finance industry.
Currently, 90 percent of all residential mortgages are financed through Fannie and Freddie or the Federal Housing Administration. While these entities have played a vital role in the recovery of the housing finance system, they essentially now operate as a government-directed monopoly.
Plus, as long as Fannie Mae and Freddie Mac continue to operate in their current government-controlled status, taxpayers are at risk for nearly 100 percent of the cost of another downturn in the housing and mortgage market. That is simply unacceptable by any measure and it is a glaring reminder of why comprehensive reform needs to be urgently addressed by Congress.
After it was clear they would otherwise implode, Fannie Mae and Freddie Mac were placed in government conservatorship at the height of the housing crisis. Conservatorship was intended to be an emergency and temporary fix. Fannie and Freddie have now been in conservatorship for over five years—at the expense and risk of the taxpayer.
The housing market is recovering, however, and it is long past the time to create a new, stable housing finance system that features private capital and protects taxpayers.
Unfortunately, some policymakers are not joining the reform efforts that have been launched. Strong reform ideas have been unveiled in both the House and the Senate. Democrat Tim Johnson, who chairs the Senate Banking Committee, and ranking Republican member Mike Crapo are nearing completion on sensible legislation.
But others are disinclined to support such efforts, pointing to recent headlines indicating that Fannie and Freddie are currently "profitable" and that said profits flow to the federal government. Some of these reluctant lawmakers argue that Fannie and Freddie should simply be transitioned from conservatorship to their prior flawed status. That is a really bad plan.
As the Department of Treasury has pointed out, the profitability of Fannie and Freddie is overstated. The recent positive results posted by both include one-time tax benefits, use of loan loss reserves and one-time settlements of litigation. In addition, they have benefited from an increase in valuation of their investment portfolios, which everyone agrees must be reduced going forward. They also benefited massively from direct investment by taxpayers during the crisis. That support cannot and should not continue, and a better system is clearly needed.
Congress should not tolerate the current system, and limping along with it would be flawed and dangerous. Congress should reform these giant government monopolies and ensure private capital absorbs the primary risk with a reserve fund to protect taxpayers. A system with well-capitalized private participants would serve the housing market well and protect future taxpayers.
Unfortunately, the window of opportunity for reform may only be open for a few more months. As the November elections approach, the chances for congressional action diminish and it may be hard to rekindle momentum next year.
The goal of preserving the opportunity for home ownership while protecting taxpayers is deserving of action now.