“Fannie and Freddie, I believe, should be abolished.”
—Rep. Barney Frank (D-MA), August 18, 2010
The Treasury Department recently submitted a report to Congress as required by last year’s Dodd-Frank Making Wall Street Bailout Permanent law. Unfortunately, the report reveals the Obama administration’s position to be long on platitudes and short on leadership when it comes to ending taxpayer support of the housing finance market. On Tuesday, March 1, 2011, Treasury Secretary Geithner will testify on GSE reform at a hearing of the House Committee on Financial Services.
Under the terms of the GSEs’ 2008 conservatorship, the Federal Housing Finance Agency (FHFA) operates the entities ostensibly as business enterprises with the Treasury Department injecting taxpayer money into the organizations when company liabilities exceed the value of assets. To date, Treasury has provided a $153 billion taxpayer bailout to the GSEs. The Congressional Budget Office (CBO) estimates that total federal subsidy outlays to the GSEs could total nearly $400 billion through 2019.
Issues of concern
A predilection for big government: The report calls for a “reformed and strengthened FHA” providing government support for mortgages to “creditworthy borrowers that have incomes up to the median level for their area” but “in a way that does not allow the FHA to expand during normal economic times to a share of the market that is unhealthy or unsustainable.” The administration apparently has no reservations about technocratic management of specific economic sectors to determine whether a market share is “unhealthy” or “unsustainable.”
One might also wonder why median income earners with good credit need a market-meddling government agency to obtain a mortgage but that’s beside the point. The Obama administration intends to use the levers of government to achieve its desired political ends regardless of the lack of economic logic. According to the administration’s illogic, all that’s likely needed is more deficit spending to hire more bureaucrats at the FHA, because, after all, the “FHA should also have the technology and talent needed to run what should be a world-class financial institution.”
Same weapon, new target: Realizing that federal support of homeownership for favored constituencies can have deleterious side effects, the Treasury Department’s report now claims “a renewed commitment to affordable rental housing.” In its drive to distort a new sector of the housing market, the administration promises to explore support “such as risk-sharing with private lenders,” which sounds eerily similar to the implicit guarantee that doomed Fannie and Freddie. Of course, the Obama administration maintains that only with additional government spending can the problems of rental affordability be solved. Hence the Treasury Secretary recommends “additional resources to address clear gaps” and advocates for a “dedicated, budget-neutral financing mechanism” to support the administration’s objectives.
Saving the bailouts: Rather than outline specific steps the Obama administration is taking towards resolution of the off-budget, nationalized behemoths Fannie and Freddie, the report merely suggests options for future consideration. To its credit, the report recognizes that a privatized system of housing finance would “[lead] to more long-run economic growth and [reduce] the inflationary pressure on housing assets” but the Treasury Department worries that this would reduce the government’s ability to provide support in the event of a credit crisis. Democrats forget that the era of bailouts is over.
As the losses continue to mount for Fannie and Freddie, the Obama administration promotes policies that increase spending despite a recent report from the National Association for Business Economics (NABE) in which 47 professional forecasters expressed concern “about high levels of government deficits and debt.” House Republicans have pledged to end the government takeover of Fannie and Freddie, shrink their portfolios, and establish minimum capital standards. It is critical that we rein in government spending in order to allow the housing market and the broader economy to recover and create the jobs that Americans need.