Nationalization of the Housing Sector Should Be Stopped
June 7, 2013
The U.S. housing finance sector has become a largely nationalized and socialized "government housing complex." As the central part of that complex, Fannie and Freddie are now owned by, run by and simply part of the government. They have attained even greater monopoly power and an even more dominant market share than they had before the crisis. They have returned to reporting large profits, though they are still completely wards of the U.S. Treasury, says Alex J. Pollock, a research fellow with the American Enterprise Institute.
Fannie and Freddie's current large profits are completely dependent on:
- Being granted generous and indefensible regulatory loopholes by Dodd-Frank's unfettered bureaucracy, the Consumer Financial Protection Bureau (CFPB).
- Having the Federal Reserve buy huge amounts ($1 trillion and counting) of Fannie and Freddie's mortgage-backed securities, but of course no private ones, at yields and spreads only a central bank could love.
Ideally, Fannie and Freddie's current status should be brought to an end with a five-year transition. What they do that is actually a mortgage business should be privatized, while their government subsidy program should become explicitly a government subsidy program and be merged into the operations of the U.S. Department of Housing and Urban Development. This straightforward program is not likely to be enacted in the current political configuration. If that is true, then, as wards of the government, buttressed by the Treasury, the CFPB and the Fed, the two will continue for years to build their monopoly power, probably leading us in time into a new out-of-control cycle of excessively leveraged and politicized housing finance.
Instead, Congress should enact a medium-term program to move toward a private, less government-dominated mortgage sector. Such a program could include the following intermediate steps:
- Reduce all of Fannie and Freddie's conforming loan limits by 10 percent a year for 7 years, a cumulative reduction of about 50 percent.
- Continually reduce Fannie and Freddie's mortgage and investment portfolios.
- Change Fannie and Freddie's charters from perpetual to limited life charters, with reauthorization required in 2020.
- Put more private capital in front of the mortgage credit risk of the government. Require credit enhancement of Fannie and Freddie's credit risks, by private mortgage insurance coverage down to a 70 percent loan-to-value ratio (LTV), or equivalent other private credit enhancement.
- Stop the Federal Reserve from buying any more Fannie and Freddie mortgage-backed securities, so the market can clear rather than being heavily manipulated by the monetization of mortgages.
Source: Alex J. Pollock, "What to Do With Fannie and Freddie," American Enterprise Institute, May 31, 2013.
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