Republicans miss a chance to put the toxic twins out of business.

Mar 31, 2011
WSJ

Democrats like to paint House Republicans as “extreme” ideologues held captive by the Tea Party. But after reviewing the House GOP’s new plan to reform the housing market, we wish the Tea Party had grabbed a few more hostages.

On Tuesday Republicans on the House Financial Services Committee introduced eight bills to reform Fannie Mae and Freddie Mac, the government-created mortgage giants at the heart of the financial crisis. These toxic twins have already gobbled up $156 billion of taxpayer money. But not one of the eight bills would shut down Fannie or Freddie—even on a delayed fuse.

You could argue that the House GOP has rolled out a less aggressive reform plan than one of the options recently floated by Treasury Secretary Timothy Geithner. Yes, the same Secretary Geithner who quietly gave Fan and Fred an unlimited call on taxpayer cash on Christmas Eve of 2009. Can he really be among the Beltway’s boldest voices for reform only five months after a bailout-weary electorate turned the House over to Republicans?

Those Republicans seem to have decided that fundamental reform isn’t possible with a Democratic Senate. At least that’s the charitable view. Another is that Financial Services Chairman Spencer Bachus, a longtime friend of the mortgage twins, still can’t liberate himself from the housing lobby that wants Fan and Fred to rise again. Whatever the reasons, taxpayers hoping for a clean break from Washington’s housing folly are being offered merely incremental enhancements.

This is not to say that the incremental moves aren’t positive. They would represent a great first step if this wasn’t a once-in-a-Congressional-career chance to slay these beasts before they live to start another financial crisis. History shows that, once the memories of 2008 begin to fade, Fan and Fred will be extremely persuasive in convincing politicians that allowing them to grow is a boon to homeowners.

For now, the Republican plan would begin to cut them down to size. Texas Representative Jeb Hensarling’s bill would reduce the size of the mortgage portfolios held by Fannie and Freddie over five years. Each of these “government-sponsored enterprises” would be limited to holding $700 billion in mortgages in year one and no more than $250 billion by year five.

These loans and pools of loans that Fan and Fred own outright are a key source of risk. But remember that the much larger potential liabilities are all of the mortgages owned by others but guaranteed by Fan and Fred, and therefore by taxpayers. Fan and Fred could continue issuing those guarantees indefinitely.

Californian Ed Royce’s bill would abolish Fan and Fred’s affordable housing goals. Former Fannie Mae executive Ed Pinto has shown how increases in these goals mandated by the Clinton and Bush Administrations led to catastrophic declines in the quality of underwriting at the companies. Mr. Royce said this week that as a result Fan and Fred had purchased more than $1 trillion in “junk loans” from the likes of Countrywide Financial, and his bill would also reduce taxpayer risk.

A third bill, by Texan Randy Neugebauer, would direct federal regulators to slowly raise the fees Fan and Fred charge to guarantee mortgages against default. The idea is to gradually price this insurance in line with Fan and Fed’s private competitors. This could be significant, if taxpayers can count on regulators to execute the policy.

Another useful reform is New Jersey Representative Scott Garrett’s plan to strip Fan and Fred’s exemption from new mortgage rules mandated by the Dodd-Frank law. The Obama Administration this week rolled out new risk-retention rules, but they affect only private issuers of mortgage-backed securities. Absent reform, this will freeze in place the dominant share of the mortgage market now enjoyed by Fannie, Freddie and the Federal Housing Administration.

The House GOP thinking seems to be that throwing out several reforms will increase the chances that one or more will stick in the Senate. Perhaps that will turn out to be shrewd, but offering so many bills could also let the Senate’s Fan and Fred backers pick the least important and claim to support “reform” that is no such thing.

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