It’s time for a fundamental rethinking of the federal government’s role in the mortgage industry.
Last week, the importance of doing so was highlighted when the National Association of Realtors reported a 27 percent decline in home sales in July compared to June, reaching the lowest point since the organization started tracking the numbers in 1999.
The association’s chief economist, Lawrence Yun, said the decline may continue in the coming months, but he added that “a sales recovery could pick up quickly, provided the economy consistently adds jobs.”
Such optimism rests on a shaky foundation. Last week, the Labor Department reported 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 people unemployed, growing legions of Americans simply can’t afford to buy homes. But, don’t tell that to Fannie Mae, Freddie Mac and the Federal Housing Authority, 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 feds two years ago.
Then, there’s the trillions more they cost taxpayers by sparking the Great Recession. 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, “providing guarantees for increasingly risky types of mortgages without charging nearly enough to cover the risk.”
But, Geithner said, that is a way to “maximize short-term returns to shareholders and senior management.” Doing so was possible only because of a “perceived guarantee by the government and an absence of effective oversight,” according to Geithner.
However, 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 we leave American taxpayers on the hook for trillions of dollars of other people’s mistakes.
There’s no middle ground.