Fannie Mae headquartersLast Friday, the Obama administration finally released its plan for the U.S. mortgage market. The authors, which include the Treasury and the Department of Housing and Urban Development, say the reform "dramatically transforms the role of government in the housing market" by reducing the government's presence, really for the first time since the Depression. As for those controversial (and bankrupt) mortgage giants, Fannie Mae and Freddie Mac, the authors write that their goal is to "ultimately wind down both institutions."
Getting the government out of the market and shutting down Fannie and Freddie are popular goals these days, and the plan has won almost uniform praise. "A hugely positive development," approved a Washington Post editorial. Republicans were actually supportive. "On a number of these areas, we're going to be on the same page, and that was encouraging, and to see it in writing is equally encouraging," said Rep. Scott Garrett, =R., N.J., who had been one of Fannie and Freddie's most outspoken critics. Even the Wall Street Journal's editorial page"”which would blame Fannie and Freddie for global warming (if it believed in global warming, which it doesn't)"”wrote, in a piece titled "The End of Fannie Mae," that the plan is "enough to make you believe in miracles."
But before Fannie and Freddie's detractors clink champagne glasses, they should know that the administration's plan"”which it was required to produce under last year's Dodd-Frank financial reform"”makes no decisions of real consequence. You don't have to be a cynic to conclude that Fannie and Freddie aren't going anywhere.
The administration plan proposes certain steps to coax private capital back into the mortgage market. (As things stand today, there are very few government-free home sales; Fannie, Freddie, and the Federal Housing Administration guarantee more than 90 percent of new mortgages.) For example, the plan would reduce the size of the loans Fannie and Freddie can buy in high-cost areas from $729,750 to $625,500. It would also increase the size of the down payment that Fannie, Freddie, and the FHA require and raise the fee these three entities charge. The purpose of these proposed changes is to make it easier for private firms to compete. "As the market begins to heal and private investors return," the authors of the plan pledge, "we will seek opportunities, wherever possible, to accelerate Fannie Mae and Freddie Mac's withdrawal." But what if private capital doesn't want anything to do with most of the American mortgage market? And even if some private capital does return, the decrease in loan limits and the increase in down payments are "clearly not enough to 'wind down Fannie and Freddie,'" Amherst Securities concluded in a recent report.
What would the government's continuing role in the housing market be? The plan lays out three different options. Option 1 is that the government would backstop mortgages only for low-income borrowers in order to keep those affordable. Option2 is that the government would backstop only low-income mortgages most of the time but could step more aggressively into the market in times of stress to keep the money flowing. Option 3 is that private companies could package mortgages into securities that carried an explicit government guarantee.
The administration didn't spell out which option it prefers. Nor is it committing to significant immediate action. In a talk at the Brookings Institution on Friday after the release of the plan, Treasury Secretary Tim Geithner said that depending on the health of the housing market, the process"”whichever that might be"”could take five to seven years. Any major steps would require congressional action.
Another way to think about the plan is that the administration has thrown down a gauntlet. The Republicans can pick it up or not. Probably they won't. (There's a reason the GOP isn't protesting the plan.) The housing market looks right now as though it will head downward again. No politician wants to be blamed for that. And as HUD Secretary Shaun Donovan has pointed out, a plunging housing market would increase Fannie and Freddie's losses, because the homes they sold would be worth less, and because more borrowers would default on their mortgages.
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