With very little fanfare the Federal Housing Finance Agency (FHFA) released a strategic plan to wind down Fannie Mae and Freddie Mac yesterday.
As conservator the FHFA was given a statutory mandate to “take such action as may be necessary to put [Fannie Mae and Freddie Mac] in a sound and solvent condition.” Furthermore, it was tasked with “reorganizing, rehabilitating, or winding up the affairs of a regulated entity.”
But while the strategic plan outlines a path towards achieving those goals, the Obama administration’s recently announced housing policies seem to be pushing in the opposite direction. “I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates,” Obama said in his State of the Union.
The plan Obama laid out would necessarily lead to a much larger role for Fannie and Freddie. Among the new housing policies included in the White House’s plan was an expanded system of principal reduction that would allow the GSEs to write down mortgage balances (a move the FHFA has opposed in the past).
The plan would also continue the recent trend to push many of the Obama Administration’s housing policies through the Federal Housing Authority (FHA), which as of now hasn’t received the same level of criticism as Fannie and Freddie. Under the program nearly every homeowner who has been current on their monthly payments for six months and maintains a credit score of 580 or higher to refinance their mortgage through the FHA. The plan, which creates enormous risks for taxpayers, is expected to cost $10 billion and would be financed by a new tax on banks.
The reemergence of Fannie and Freddie in Obama’s housing policies signals a marked shift from last year when the administration released a white paper outlining the gradual wind-down of Fannie and Freddie.
“In the past, the government’s financial and tax policies encouraged housing purchased and real estate investment over other sectors of our economy, and ultimately left taxpayers responsible for much of the risk incurred by a poorly supervised housing finance market,” the administration wrote.
And yet one year later President Obama seems to be heading in the opposite direction. Rather than “responsibly reduc[ing] the role of” the GSEs, creating a plan to “wind down both institutions,” and “bring private capital back into the mortgage market,” as the paper recommends, the latest housing policy moves do exactly the opposite.
Taxpayers have already bailed out Fannie Mae and Freddie Mac to the tune of $169 billion and the FHFA’s forward-looking projections show the GSEs will likely require another $51 billion to $142 billion over the next two years. Moreover, a recent report from the FHA’s auditor show that it too is likely to require a taxpayer-funded bailout in the next year.
Is now really the time to expand the risk of these programs?
No. It’s time to finally follow the conservator’s advice and begin the process of winding down the government’s involvement in the housing market. Congress should act now to increase the GSEs guarantee fee, hasten the divestiture of their holdings, and set limits on their portfolio size. As the government’s grip loosens, the private market can move to fill in the gap, without the attendant risks to taxpayers.