By Carten Cordell │Watchdog.org, Virginia Bureau
ALEXANDRIA — When the housing market tanked in 2008, it swamped Republican presidential candidate John McCain, swept Barack Obama into the White House, launched the Occupy Wall Street movement, and produced calls for radical banking reform. Even McCain conceded days after Obama’s inauguration that “there are some greedy
people on Wall Street that perhaps need to be punished.”
Then it emerged that easy money — supplied chiefly through two federal agencies supported by Democrats and Republicans alike — had played a key role in the collapse. Calls came for the reform of those two agencies.
Last week, we got our reform — or as much as we’re likely to get. And it ain’t much.
U.S. Sen. Mark Warner’s, D-Va., plan to wind down government-backed mortgage giants Fannie Mae and Freddie Mac is garnering wide praise as the first substantial step in reducing taxpayer risk in the housing market.
The Housing Finance Reform and Taxpayer Protection Act, introduced last week and co-sponsored with U.S. Sen. Bob Corker, R-Tenn., seeks to all but eliminate the two mortgage giants in five years, replacing them with another government managed underwriter, the Federal Mortgage Insurance Corp. FMIC would insure mortgages from losses without using federal funds.
Operating much like the Federal Deposit Insurance Corp., FMIC would collect premiums from private investors to insure the mortgage risk — including 10 percent of the principal of the loan in case of a default — but the plan is also backed with an explicit government guarantee. If another housing meltdown occurred, taxpayers could again be on the hook.
“We would essentially be recreating the old housing policies of the past of Fannie Mae and Freddie Mac under a different name,” said James Gattuso, a senior policy fellow in regulatory policy at the Heritage Foundation, a Washington, D.C.-based conservative think tank.
“(The Housing Finance Reform bill) says it has private incentives and some private participation, but at the bottom of it all is still a federal guarantee. That could get us right back into the problems we had before the housing bubble burst.”
No one is sure what the final bill will look like after it winds its way through the Senate, or whether Congress will pass the Senate version. But for some, mere talk of reforming the two government-sponsored enterprises seems like progress.
“I am of the opinion that we don’t need a guarantee for the mortgage market in terms of Fannie and Freddie,” said Mark Calabria, director of financial regulation studies at the Cato Institute, a Washington, D.C.-based libertarian think tank. “The bill accepts that, what I think, is a political calculation of, ‘We can’t get rid of Fannie and Freddie without replacing it with something that is less bad rather than something that is good.’”
Some in the housing industry will likely work to make sure government continues its prominent role in the market.
“It’s a great start to a conversation,” said Stacey Ricks, director of public relations for the Virginia Association of Realtors. “Everyone’s very excited that they are addressing this situation. Our big deal is that as long as there is some form of guarantee, that the federal government will still make sure that anybody can have access to a long-term fixed rate mortgage. We need to make sure that that’s still available to people.”
“Anything that happens is going to imply five or six years of uncertainty,” said Calabria. “To an extent, that’s simply unavoidable. Whatever we move toward, there’s going to be a transition period.”