Congress Debates Taking A Step Back From The Mortgage Market

The mortgage giants Fannie Mae and Freddie Mac got hit so hard by the housing crisis that they required a massive federal rescue. Now lawmakers are looking to scale back the two entities' role — and the government's — in the mortgage market.

The Senate Banking Committee is expected to vote Thursday on President Obama's nominee to head the agency that oversees Fannie and Freddie.

The government took them over during the worst of the housing crisis, at a cost to taxpayers of nearly $200 billion. Now that the housing market is recovering, the companies have turned profitable, and they are sending money back to the Treasury.

But many lawmakers remain worried about the government's outsize role in the mortgage market, and they're looking to make a change.

Before Fannie and Freddie were taken over by the government in 2008, they operated in a kind of legal limbo. They were for-profit companies, helping to funnel money into the housing market. But they had an implicit guarantee that if they got into trouble, the government would bail them out.

Tennessee Sen. Bob Corker says that has always been a problem. He says "almost everybody would say" that it's not appropriate to have "private gain and public losses."

"This implicit guarantee is incredibly inappropriate," he says.

New Approaches

Corker, a Republican, and Democratic Sen. Mark Warner of Virginia have crafted a plan to gradually do away with Fannie and Freddie, while handing one of their functions over to a new government agency. That agency would guarantee mortgage-backed securities, to keep money flowing into the housing market. But unlike Fannie and Freddie, the new agency would collect a fee for the government's backing.

The plan includes a number of other safeguards designed to protect taxpayers: Homebuyers would have to make a 5 percent down payment. And the companies issuing mortgage-backed securities would have to hold at least 10 percent capital in reserve. Corker says that's twice as much capital as Fannie and Freddie would have needed to weather the housing crisis without a government bailout.

"If Fannie and Freddie had had 5 percent capital, there would have been no taxpayer contributions," he says.

The Obama administration says it welcomes the bipartisan Senate approach.

Meanwhile, House Republicans, led by Rep. Jeb Hensarling of Texas, have crafted an alternative bill. It would move the government even further out of the mortgage market, leaving only a limited role for the Federal Housing Administration to help first-time homebuyers and low-income families.

But Warner told a gathering at the Bipartisan Policy Center on Wednesday that the House approach is a political nonstarter. He said Hensarling's bill is an "ideologically pure exercise which will never have a single Democrat ever support it."

What Change Could Mean For Homebuyers

Economist Mark Zandi of Moody's Analytics says either bill would result in slightly higher interest rates on home loans.

But Zandi says the increase would be bigger under the House Republicans' bill because the measure would lack a government guarantee.

"More importantly for most Americans, there probably would be very few 30-year, fixed-rate loans out there — at least not for the typical homebuyer," Zandi says. "And the other thing to consider is that in really bad times, if the government really didn't step in, it would be pretty tough to get a mortgage loan for anybody at any time."

House Republicans insist their bill would not end 30-year, fixed-rate mortgages. They note such loans are already available for high-priced homes that are too expensive to qualify for a government guarantee.

But Zandi says the experience in other countries suggests that without a government backstop, long-term fixed-rate mortgages would not be widely available. He also says it's unrealistic to pretend the government would stay out of the mortgage market altogether.

"The reality is that when push comes to shove, if things are really bad, the government will step in," he says. "So it's important that we all understand that, make that explicit, price for it to make sure that taxpayers don't pay for it in the future."

These days, it's Fannie and Freddie who are paying taxpayers. The companies have returned $131 billion in dividends to the Treasury so far.

Corker argues that's one more reason the government should move quickly to wind down the mortgage giants — before lawmakers become too attached to that money, and it becomes harder than ever to cut the cord.

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