At stake in the debate over the future of the two government-controlled entities that back most mortgages today — Fannie Mae and Freddie Mac — is the cherished 30-year fixed-rate mortgage and other features of a housing market that functioned remarkably well for decades until speculative excesses led to a crash and a prolonged economic crisis.
The conservative Heritage Foundation, now headed by former Sen. Jim DeMint of Tea Party fame, came out last week against a new bipartisan Senate bill that would wind down and replace Fannie and Freddie with a complex mix of private lending and government guarantees.
One of Heritage's main complaints about the bill from Sens. Tim Johnson, D-S.D., and Mike Crapo, R-Idaho, is that it would create yet another financial regulator with ill-defined but sweeping powers to regulate mortgages, adding to the half dozen agencies already overseeing housing finance.
Amen to that, one is tempted to say.
Heritage sums up its objection to the Johnson-Crapo bill and similar legislation proposed last year by Sens. Mark Warner, D-Va., and Bob Corker, R-Tenn.: "The Senate bills would not help people to buy homes; they would only protect investors and special interests at taxpayers' expense."
The critique from this conservative bastion is remarkably similar to an earlier complaint about the Warner-Corker bill from ultraliberal economist Robert Kuttner in somewhat more colorful language: "If something like the 'bipartisan' Senate bill passes," Kuttner wrote last summer in American Prospect, "private lenders will cover their own fannies thanks to the new federal guarantee, but will demand higher interest rates from borrowers."
Kuttner has a different solution in mind — restore the two government-sponsored enterprises (GSEs) to their original status as full-fledged public entities, not the hybrids they became when their shares were s! old to investors.
"The lesson is not that government should get out of the business of backing mortgages," Kuttner concluded. "It's that public entities should be public, and should operate in the public interest."
The debate doesn't stop there. The centrist Progressive Policy Institute, an offshoot of the Democratic Leadership Council, has also urged that Fannie and Freddie be preserved — not liquidated, but reformed.
"GSE reform is essential, but it shouldn't mean a death sentence," PPI analyst Jason Gold wrote inU.S. News and World Report last summer. "Shuttering the GSEs completely … makes little sense. The idea that you can completely dismantle a housing finance infrastructure that is the foundation of an $11 trillion market is a fantasy the likes of which is only found in Washington."
Gold, who has since moved on to McGraw-Hill Financial, predicted the effort to wind down Fannie and Freddie would result in chaos "as banks and investors try to reconfigure trillions of dollars in mortgages they have sold into secondary markets with the help of Fannie and Freddie."
Some of that chaos is already here as the private investors who still own shares in Fannie and Freddie even though it has been in government "conservatorship" since 2008 have filed several lawsuits against the government for arrogating to itself virtually the totality of the bountiful profits reaped by the two entities as the housing market rebounds.
No less a left-wing icon than Ralph Nader, in his latest guise as shareholder advocate, is fighting to retain some value in Fannie and Freddie shares, along with some well-endowed hedge funds who have bought the shares in hopes of a speculative windfall.
For the record, USA TODAY's editorial board came out this week in favor of the Johnson-Crapo scheme to create a powerful new Federal Mortgage Insurance Corp. that would both provide government guarantees on mortgages in lieu of a liquidated Fannie and Freddie and regulate the finance industry to en! sure that! borrowers of all stripes get a shot at affordable mortgages.
Though the Johnson-Crapo bill is up for a committee action this month, all of the strange bedfellows opposing the legislation acknowledge that little will be settled until after the midterm elections in November. Given the complexity of the task, it's hard to imagine that much will happen very quickly after that, either, especially with opinion so divided.
The fact is we don't need a new regulator for mortgages because there is already an agency, the Federal Housing Finance Agency, which oversees Fannie and Freddie even while they are in limbo, as well as the Federal Home Loan Banks.
While the Heritage Foundation opposes the complicated new structure and regulatory authority of Johnson-Crapo, it also wants government to get out of housing finance altogether, as proposed in some House bills, which is where it parts company with its bedfellows on the left.
But there seems to be a strong feeling in Washington that there has got to be a simpler way to right the situation than the intricate and untested provisions of these complex Senate bills.
Darrell Delamaide has reported on business and economics from New York, Paris, Berlin and Washington for Dow Jones news service, Barron's, Institutional Investor and Bloomberg News service, among others. He is the author of four books, including the financial thriller Gold.
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