Washington Post Editorial: Mortgage giants GSEs in limbo: In housing, a dangerous policy vacuum grows.

Washington Post Editorial: Mortgage giants GSEs in limbo: In housing, a dangerous policy vacuum grows.
Copyright by The Washington Post
Sunday, February 7, 2010
http://www.washingtonpost.com/wp-dyn/content/article/2010/02/06/AR2010020602536.html


THERE IS NO END in sight to the federal bailout of Fannie Mae and Freddie Mac. President Obama's fiscal 2011 budget proposal said as much in a few phrases that promised nothing more definitive than continued "monitoring" of the two mortgage giants, which have been operating since mid-2008 in the legal and organizational limbo known as government "conservatorship." The administration had said its plans for definitive reform could be expected "at the time of the budget," not in the budget itself, so technically this doesn't count as a broken promise or a blown deadline. Still, as the two agencies' chief regulator, Edward J. DeMarco, gently reminded congressional leaders on Tuesday, conservatorship was intended as a "timeout" during which policymakers could reinvent the entities. With an election year upon us, that timeout is looking more and more like a cop-out.

This is alarming. The Fannie-Freddie business model -- "government-sponsored enterprises" (GSEs) with private shareholders but a public purpose, promoting homeownership -- is a proven loser. In fact, Fannie and Freddie were in large part responsible for inflating the housing bubble that burst so disastrously in 2007. The market's perception (correct, as it turned out) that the GSEs enjoyed federal backing enabled them to take on far more risk than their capital bases could support.

Continuing to pump taxpayer money into Fannie and Freddie so that they can continue to securitize home mortgages -- the Treasury Department has covered $111 billion worth of their losses so far -- is justifiable as an emergency measure. Without it, the U.S. housing market would have collapsed: Fannie and Freddie now back the vast majority of new mortgages, and the homeownership rate has nonetheless fallen almost two percentage points from its 2004 peak of 69 percent.

But the United States cannot afford the indefinite de facto nationalization of housing finance. The administration estimates that the GSEs' losses will cost the government more than $54 billion in fiscal 2011, plus another $23 billion in fiscal 2012, assuming the White House's economists have guessed right about the foreclosure rate and other variables. The entities' debt totals more than $1.6 trillion, on top of the existing national debt of $12.3 trillion.

Moving to a new model of mortgage finance is not easy because it provokes resistance from the old system's stakeholders, who range from mortgage bankers to home builders to housing affordability advocates. They are not eager to face a future in which the federal government would not promote homeownership as aggressively as it once did. This is perhaps an explanation for the current policy paralysis, but hardly an excuse. Congress and the Obama administration need to set clear, consistent and sustainable limits on federal support for mortgage finance, and the sooner the better.