The plan was intended to address the problems that arose in the subprime mortgage market prior to the economic crisis in 2008 and called for eliminating Fannie Mae and Freddie Mac and establishing new “private” mortgage companies to fulfill those roles. But the much ballyhooed plan offered little insight as to how to make it happen and it lacked assurances taxpayers would not be forced to bail out failing lending institutions in the future.
The Role of Government in Housing
Further, a host of lobbying groups including the Mortgage Bankers Association offered proposals that would replace Fannie Mae and Freddie Mac (FnF) with new GSE’s and actually expand the role of government in the lending industry and preserve the financial services industry as is.
Since then, the Congress and the Obama administration slapped together the so-called “payroll tax deduction” extension for 60 days, another idea pitched as a benefit to taxpayers but it all it does in reality is gouge the social security system for more money. Meanwhile, FnF continued to burn through cash at the expense of taxpayers ($175 billion and counting) as they sit snuggly in a government conservatorship.
More recently, Bloomberg News reported that the hastily passed pay-roll tax cut extension included White House crafted ear marks that Mr. Obama once campaigned against that will allow Congress to divert funds from FnF to pay for “general government expenses.”
Moreover, the legislation also includes a play that raises loan limits for FHA insured mortgages while eliminating a tax deduction for private mortgage insurance. FHA mortgages have historically been targeted for first time home buyers that were not up to the standards of FnF. In fact, FHA backed loans allowed buyers to come up with as little as 3% of a home’s value, provided that private mortgage insurance was purchased by the buyer.
In short, the lawmakers who allowed FnF to tumble into the abyss are up to the same game with the FHA, and the long and short of it is that the Feds will not be leaving the mortgage business any time soon.
“The goal was, at the beginning of the year, how we wind these down?” said Edward Pinto of the American Enterprise Institute. “And at the end of the year we have further entrenched them and made it more difficult to wind them down, which is classic Washington.”
The news service also points out how Fannie, Freddie and the FHA “currently back more than 90 percent of loan originations, about double what they did during the subprime lending boom.”
The fact is that the plan to reduce the government's role in housing finance and wind down FnF stalled as the White House and Congressional lawmakers could not agree on how to get it done. At the end of the day some housing analysts fear lawmakers will now start looting the government-sponsored enterprises as cash cows to fund expenses unrelated to housing which is a similar play to the so-called social security lock box that is nowhere to be found.
In sum, the federal government will remain mired in the ailing housing finance market in perpetuity as populist pundits, politicos and protesters continue to beat the anti-capitalist drum when all along the government played a lead role in bringing down the housing market which is a far cry from hope and change.
Source:
Maura Reynolds, Backtracking U.S. Lawmakers Expanded Federal Role in Mortgages, Bloomberg Businessweek, Dec 29, 2011
Kyle Colona - Kyle Colona is a freelance writer from the New York area with an extensive background in legal and regulatory affairs.
