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Dysfunctional consequences

18 March 2013 By Daniel Indiviglio

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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