With very little fanfare the Federal Housing Finance Agency(FHFA) released a strategicplan to wind down Fannie Mae and Freddie Mac yesterday.
As conservator the FHFA was given a statutory mandate to “takesuch action as may be necessary to put [Fannie Mae and Freddie Mac] in a soundand 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 towardsachieving those goals, the Obama administration’s recently announced housingpolicies seem to be pushing in the opposite direction. “I’m sending thisCongress a plan that gives every responsible homeowner the chance to save about$3,000 a year on their mortgage, by refinancing at historically low interestrates,” Obama said in his State of the Union.
The plan Obama laid out would necessarily lead to a muchlarger role for Fannie and Freddie. Among the new housing policies included inthe White House’s plan was an expanded system of principal reduction that wouldallow the GSEs to write down mortgage balances (a move the FHFA has opposed inthe past).
The plan would also continue the recent trend to push manyof the Obama Administration’s housing policies through the Federal HousingAuthority (FHA), which as of now hasn’t received the same level of criticism asFannie and Freddie. Under the program nearly every homeowner who has beencurrent on their monthly payments for six months and maintains a credit scoreof 580 or higher to refinance their mortgage through the FHA. The plan, whichcreates enormous risks for taxpayers, is expected to cost $10 billion and wouldbe financed by a new tax on banks.
The reemergence of Fannie and Freddie in Obama’s housingpolicies signals a marked shift from last year when the administration releaseda whitepaper outlining the gradual wind-down of Fannie and Freddie.
“In the past, the government’s financial and tax policiesencouraged housing purchased and real estate investment over other sectors ofour economy, and ultimately left taxpayers responsible for much of the riskincurred by a poorly supervised housing finance market,” the administrationwrote.
And yet one year later President Obama seems to be headingin the opposite direction. Rather than “responsibly reduc[ing] the role of” theGSEs, creating a plan to “wind down both institutions,” and “bring privatecapital back into the mortgage market,” as the paper recommends, the latesthousing policy moves do exactly the opposite.
Taxpayers have already bailed out Fannie Mae and Freddie Macto the tune of $169 billion and the FHFA’s forward-lookingprojections show the GSEs will likely require another $51 billion to $142billion over the next two years. Moreover, a recent report fromthe FHA’s auditor show that it too is likely to require a taxpayer-fundedbailout 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 andbegin the process of winding down the government’s involvement in the housingmarket. Congress should act now to increase the GSEs guarantee fee, hasten thedivestiture of their holdings, and set limits on their portfolio size. As thegovernment’s grip loosens, the private market can move to fill in the gap,without the attendant risks to taxpayers.