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Wednesday, 01 October 2014

Dysfunctional consequences

Cure for U.S. housing malaise may sustain disease

The cure for the U.S. housing malaise may sustain its disease. A new Senate bill seeks to forbid Congress from raising Fannie Mae and Freddie Mac’s mortgage guarantee fees to pay for federal spending. It sounds sensible. But in the alternate universe that is Washington, it may kill one of the few ways available to reduce taxpayer support for housing and bring back private capital.

The legislation would prevent Congress from paying for unrelated programs by raising the insurance premiums charged by government mortgage finance agencies. Just last year lawmakers boosted these fees for 10 years to pay for a two-month extension of subsidized student loans.

That’s awful policy. So it’s no surprise that the bill to nix it has inspired bipartisan support. Republican Bob Corker, an unabashed advocate for reducing the government’s role in housing, is co-sponsor with vociferous freshman Democrat Elizabeth Warren, best known for helping create the Consumer Financial Protection Bureau.

They’re right that a responsible government should either raise taxes or cut spending to reduce deficits. Furthermore, increasing Frannie’s premiums should only happen in lock-step with a broader plan to reform mortgage finance. The new bill assumes such an approach is probable.

In a perfect world, it would be. But this is the government that passed spending cuts in 2011 so unpalatable that it believed Congress would be forced to replace them with a grand debt bargain. Instead, no deal was struck and cuts began this month.

Few lawmakers have shown much eagerness to even plan shuttering Frannie nearly five years after their seizure and $188 billion bailout. And the agencies’ regulator, the Federal Housing Finance Agency, hasn’t used its authority to raise fees enough to encourage much competition.

Yet bumping up the premiums is crucial. It will put the cost of taxpayer-backed and private capital on a more level playing field. Tempting more banks and other lenders to get back into the market will reduce the government’s near-omnipresent role in backing home loans.

Preventing one of the few mechanisms for raising the fees - even if wrongheaded - sets up a nasty unintended consequence: it could actually discourage reforming mortgage finance. Allowing Washington to use Frannie as an ATM, while crazy, could, perversely, be housing finance reform’s best hope.

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Context News

The Jumpstart GSE Reform Act was introduced in the U.S. Congress on March 14. The bipartisan bill is co-sponsored by Republican Senators Bob Corker and David Vitter and Democrat Senators Mark Warner and Elizabeth Warren.

The bill has two aims. First, it would prohibit Congress from raising the mortgage guarantee fees charged by government-sponsored enterprises Fannie Mae and Freddie Mac to provide revenue to offset other government spending. Second, it would not allow the Treasury to sell the preferred shares it obtained from these institutions as part of their 2008 rescue without Congress’ approval, thereby ensuring that the firms could not escape their conservatorship without additional legislation.

The proposal’s architects hope that it will encourage Congress to take up housing finance reform, as it would eliminate the possibility that lawmakers use the agencies as a means of financing unrelated federal programs. It would also keep the GSEs in an indefinite state of limbo until a new reform measure determines what to do with them.

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