On Tuesday, Senator Mark Warner, a Virginia Democrat, and Senator Bob Corker, a Republican from Tennessee, introduced a complicated bill that is intended to solve, once and for all, the problem known as Fannie Mae and Freddie Mac. You can be forgiven for missing this piece of news. Between Edward Snowden and the Supreme Court, it was easy enough to overlook.
But it’s not unimportant. It has now been nearly five years since Fannie and Freddie were put into conservatorship by the Treasury Department. Since then, we have been through the financial crisis, the housing crisis and the foreclosure crisis. Although the housing market has come a long way back, the market for private mortgage-backed securities — that is, bundles of mortgages sold to investors without a government guarantee — remains moribund. Believe it or not, the much-maligned Fannie and Freddie have kept the housing market alive by taking on the credit risk for most plain-vanilla mortgages, especially that most sacred of sacred cows, the 30-year, fixed-rate mortgage.
Indeed, ever since the creation of mortgage-backed securities in the 1970s, this has been a critical role of Fannie and Freddie; their “wrap” helped give investors the confidence to buy securities stuffed with thousands of mortgages they were never going to inspect individually. Currently, an incredible 77 percent of the mortgages being made in America are guaranteed by Fannie and Freddie.
Yet this can’t last forever. Conservatorship was supposed to be temporary. Although Fannie and Freddie are now making a gaggle of money, for complicated reasons having to do with the way the Treasury Department originally set up the conservatorship, that money is not reducing the government’s $180 billion bailout of the two companies.
Meanwhile, many Republicans have been screaming that the financing of housing should be left to the private market and that Fannie and Freddie must be put out of business. (They believe, wrongly, that Fannie and Freddie caused the financial crisis.) And the Obama White House — shocker! — has punted.
Thus we have Corker-Warner. (The bill has six other co-sponsors, three from each party.) The first thing to note about it is that, by god, it actually would eliminate Fannie and Freddie; the two companies are supposed to be wound down within five years.
But does that mean the private market will take over? Not a chance. Warner told me that although the bill would insist that private capital absorb the first 10 percent of any losses, the federal role remains critical. A new federal agency would be established to explicitly guarantee losses beyond that. And the bill would create programs to help make homeownership possible for low-income Americans, just like Fannie and Freddie once did. Those ads Fannie and Freddie used to run showing diverse Americans smiling in front of their home-sweet-homes could easily be replayed by supporters of Corker-Warner.
When I asked Corker how he planned to sell the bill to his fellow Republicans, he said, “This is a pragmatic approach. To have liquidity in the market, you have to have some government insurance.” He said it as if it were the most obvious thing in the world. As for the social mission, he told me that the country would be better served having that mission explicitly dealt with by the federal government than to have it “embedded” as part of two companies that were always more concerned with maximizing profits.
I don’t doubt that he’s right about that. One of the big problems with the old Fannie Mae-Freddie Mac model is that because they were publicly traded companies that also had a government component, their goals were constantly at war with each other. There was too much about them that was implied rather than stated outright. Warner and Corker both stressed that the country was better served by having things like government guarantees of mortgages out in the open, rather than implied as it was in Fannie’s and Freddie’s heyday.
Yet Corker-Warner has its own unstated assumption, namely that “the 30-year fixed mortgage is a social entitlement,” as Karen Petrou, the managing partner of Federal Financial Analytics, puts it. Almost no other country offers a 30-year fixed mortgage, because 30 years is unacceptably risky to the private market — without a government backstop. The 30-year fixed is also at the heart of the idea that owning one’s home is the American Dream. Part of the reason Corker-Warner is so complicated is that it has to do backward somersaults to create a mechanism that will maintain the viability of the 30-year fixed mortgage.
The question of whether the country should even have a 30-year fixed mortgage — or whether those who want one should pay for it, rather than relying on a broad government guarantee, or whether encouraging everyone to own their own home should be government policy — is what the country should be debating. By comparison, the debate about Fannie and Freddie is the same thing it’s always been: a sideshow.
