It's time for a fundamental rethinking of the federal government's role in the mortgage industry.
The importance of doing so was highlighted last week when the National Association of Realtors reported a 27 percent decline in home sales in July, compared to June, reaching the lowest point since NAR started tracking the numbers in 1999. The association's chief economist, Lawrence Yun, said the decline may continue in coming months, but he added that “a sales recovery could pick up quickly, provided the economy consistently adds jobs.”
Such optimism about job creation rests on shaky foundations: The Labor Department reported last week that the four-week average of people filing first-time claims for unemployment benefits remained high at 486,750. And total unemployment — counting the underemployed and those who have given up looking for work — is still near 20 percent.
With so many unemployed, growing legions of people simply can't afford to buy homes. But don't tell that to Fannie Mae, Freddie Mac and the Federal Housing Administration, through which the federal government now holds 90 percent of all mortgages in the United States. Fannie and Freddie have cost taxpayers almost $150 billion in direct government bailouts since they were seized by the government two years ago. There's also the trillions more they cost taxpayers by sparking the Great Recession of 2008.
Worst of all, spending and mortgage guarantees at Fannie and Freddie aren't even “on the budget.” The two “government-sponsored enterprises” are where transparency and things like Freedom of Information Act requests go to die.
Treasury Secretary Timothy Geithner only partially understands this reality. In his Aug. 17 address to a conference on the “future of housing finance,” he described Fannie and Freddie as part of a “general race to the bottom in standards,” lowering their underwriting requirements and “providing guarantees for increasingly risky types of mortgages without charging nearly enough to cover the risk.” But this, he felt, was to “maximize short-term returns to shareholders and senior management.” Doing that was possible only because of a “perceived guarantee by the government and an absence of effective oversight,” according to Geithner.
But there was nothing merely perceived about this guarantee. The government created these entities to encourage “affordable housing,” using taxpayer backing to push banks to make riskier loans. A bunch of Fannie and Freddie's shareholders and politically well-connected senior executives made out like bandits in the process, leaving taxpayers holding the bag. So Geithner's “effective oversight” is, at best, a mere diversion and more likely another regulatory joke.
It's time for a more honest approach: Either we begin to privatize Fannie and Freddie or leave American taxpayers on the hook for trillions of dollars of other peoples' mistakes. There's no middle ground.