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Why aren't Fannie and Freddie in FinReg?

fredmac.JPG

One of the right's talking points on financial reform is that it needs to include major reforms of Fannie Mae and Freddie Mac. That seemed fair enough to me, at least until I started working on a Fannie Mae and Freddie Mac explainer and realized it belies the reality of the issue. And Republicans, I think, know that.

If you read the Republican FinReg proposal, it does three things on Fannie and Freddie: It appoints a new special inspector general inside the mortgage giants to make regular reports to Congress. It undoes the emergency measures put into place during the financial crisis. And it directs the president "to submit a plan to reform [Fannie and Freddie] to Congress no later than six months after the enactment of the Act."

In other words: Ready, set, PUNT!

What we do with Fannie and Freddie has more to do with our priorities for the housing market than our priorities for the financial system. The entities exist to make mortgages cheaper (I'll get into the how of that tomorrow). Eliminate them, or substantially change them, and mortgages will get more expensive. You're talking about taking a massive -- albeit somewhat opaque -- subsidy to the middle class and eliminating it. That is to say, the politics of reforming Fannie and Freddie are more like the politics of reforming the mortgage interest deduction than reforming financial regulation.

That's why the administration prefers to reform Fannie Mae and Freddie Mac in the context of a housing bill: The immediate effect of reform will be felt in the housing market rather than the financial sector, and you'll likely need a basket of different housing reforms to ensure some semblance of a smooth transaction. Wrapping a housing overhaul in financial-regulation reform is like trying to run an ultra-marathon while climbing a mountain.

As it is, I'm a steadfast opponent of the government's endless interventions into the housing sector, and I'd like to see some fairly radical reforms here. But I'd advise people against listening to anyone who's calling for those reforms rather than specifying what they should be. It borders on the absurd that the Republican proposal for Fannie and Freddie is for Obama to submit a proposal for Fannie and Freddie at some point in the future, but it's just one more absurdity generated by the sanctity of our program of housing subsidies. Until we're ready to talk seriously about them, we're not ready to talk seriously about Fannie and Freddie.

Photo credit: AP Photo/Pablo Martinez Monsivais.

By Ezra Klein  |  May 4, 2010; 5:22 PM ET
Categories:  Financial Regulation , Housing Crisis  
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Comments

I do believe that it would benefit the taxpayers if Fannie, Freddie and their employees were prohibited from making campaign donations to any politician or political party and politicians required to refuse these dontations.

This would remove the temptation for politicians to enact legislation that favors these entities!

Posted by: mwhoke | May 4, 2010 6:38 PM | Report abuse

"As it is, I'm a steadfast opponent of the government's endless interventions into the housing sector..."

Mr. Klein:

This is a pretty ambitious statement, implying a pretty deep knowledge of housing policy. Certainly the GSEs as they were structured had severe/fatal problems, but this statement suggests a return to the near-pure private housing market of the 1920s and before. Is this what you are proposing?

I am curious. Can you point to a developed country with a desireable housing sector where the government is essentially not involved in the housing market? Many journalists have pointed to higher homeownership rates in some less affluent countries but ignore the role of massive intergenerational transfers and low mobility rates in such places. Other times they point to affluent countries with lower homeownership but then ignore their heavy subsidies to various forms of social housing and/or heavily regulated rental markets, including effective rent controls.

Also, given that housing entails substantial externalities (neighbors seem to care if I let my house fall apart) and that housing is arguably a pretty basic need that might affect long term life outcomes, why such a zealotry for "pure market" solutions? There is a good deal of evidence that markets left to their own provide pretty lousy housing to folks with modest incomes and that this housing has negative impacts on kids and neighborhoods.

Posted by: danimmer | May 4, 2010 6:42 PM | Report abuse

@mwhoke, please read. The political support here is exactly the same as that for the mortgage interest deduction: nearly universal and deeply held by purported believers in capitalism and free markets.

@ezra, good on you. The sooner we can replace the phrase "welfare queen" with the word "homeowner" in the popular lexicon as archetype of government subsidy, the better. Alas, I predict this will happen around the twelfth of never.

Posted by: wcwhiner | May 4, 2010 6:45 PM | Report abuse

@danimmer, London real estate is awfully desireable, yet the UK lacks both the mortgage interest deduction and FNM/FRE-alike GSEs. The UK is involved in the housing market, of course, but this government in every advanced economy is involved in every market.

There is no zealotry here. What I read is skepticism that our current subsidies do any good. We spend $100+B a year on the mortgage interest deduction. FNM/FRE are on the hook for as much as $200B more, to say nothing of FHA subsidies. What are we getting for our hundreds of billions of dollars, though, but pretty lousy housing for folks with modest incomes? In my PUMA (Public Use Microdata Area), the median house price is 12x the median family income. That is the kind of number that has negative impacts on kids and neighborhoods.

Posted by: wcwhiner | May 4, 2010 6:58 PM | Report abuse

When a politician takes a very large campaign contibution from an entity that he is writing legislation concerning this entity it leads to the appearance of a conflict of interest.

It has been reported that Fannie and Freddie were massive contributors to politicians.

This should be prohibited. It matters not if the politician is a Republican or a Democrat, the appearance of a conflict is apparent and the American people deserve lawmakers who act in the interest of the people and not their reelections!

Posted by: mwhoke | May 4, 2010 7:05 PM | Report abuse

@wchiner

I certainly was not defending the mortgage interest deduction. (Best not to imply people said things they did not.) I was commenting on the breadth (which I think is dangerous) of Mr. Klein's statement calling for no government intervention in housing and not defending the nature of U.S. interventions in toto.

As for the U.K., I was not talking about the desireability of "real estate" but of housing systems. Quite a difference. And UK involvement in the "housing system" is generally stronger than the U.S. Though they may be moving away from it gradually, the UK treats housing as an entitlement, with a much larger social housing sector. Per GDP, its spending on housing would likely exceed the US', although it is certainly more progressive, with a larger portion of dollars going to lower income folks.

Again, my point was that government involvement is necessary in housing markets for lower income folks to get decent housing; not that things like the mortgage interest deduction are a good thing or are doing this. Just that complete withdrawal is not a superior solution or a practical one.

Posted by: danimmer | May 4, 2010 7:14 PM | Report abuse

@wchiner

I certainly was not defending the mortgage interest deduction. (Best not to imply people said things they did not.) I was commenting on the breadth (which I think is dangerous) of Mr. Klein's statement calling for no government intervention in housing and not defending the nature of U.S. interventions.

As for the U.K., I was not talking about the desireability of "real estate" but of housing systems. Quite a difference. And UK involvement in the "housing system" is generally stronger than the U.S. Though they may be moving away from it gradually, the UK treats housing as an entitlement, with a much larger social housing sector. Per GDP, its spending on housing would likely exceed the US', although it is certainly more progressive, with a larger portion of dollars going to lower income folks.

Again, my point was that government involvement is necessary in housing markets for lower income folks to get decent housing; not that things like the mortgage interest deduction are a good thing or are doing this. Just that complete withdrawal is not a superior solution or a practical one.

Posted by: danimmer | May 4, 2010 7:16 PM | Report abuse

It doesn't amount to much of a subsidy - it is hard to subsidize the middle class in any case.

The GSEs and other interventions make mortgages cheaper, which raises the price of housing (doh!) and all sorts of ancillary costs (property taxes, real estate commissions). It encourages investment into housing rather than businesses and reduces the mobility of labor, reducing potential economic growth and labor market flexibility.

All the while you've got the FHA guaranteeing mortgages of 3.5% down and total housing payments of 40% of pre-tax income - in 2010! In 20-freaking-10!

Get rid of the GSEs as soon as possible, get rid of the mortgage interest deduction, and if there is to be any intervention in the housing market let it be means tested vouchers.

Posted by: justin84 | May 4, 2010 8:07 PM | Report abuse

point of clarification to mwhoke: Fannie and Freddie's lobbyists were fired immediately after the federal govn't took the companies over. Their political action committees heart-staked. Both companies -- and their employees -- are prohibited from lobbying or even speaking publicly on housing policy issues, including the debate about their future. (I don't know why a similar gag order wasn't applied to the banks that received TARP funds).

Klein makes a good point that the end of the GSEs will likely drive up mortgage rates and replace 30-year fixed rate loans with something more European -- short term, variable rate loans that must be refinanced every few years. (BTW -- the housing bubble popped when too many highly leveraged borrowers with loans they had to refinance were unable to do just that.)

Posted by: apriori | May 4, 2010 9:12 PM | Report abuse

Ezra,

I think you know darn well that the Republicans have more substantive Fannie/Freddie reform ideas than made it into that hastily thrown-together "alternative" FinReg proposal.

Jeb Hensarling has a very comprehensive bill that would increase disclosure of their actions/balance sheets and begin to divest taxpayer dollars from the operations.

While it's not wholly unreasonable to suggest that such efforts should be undertaken in a housing bill, you know as well as anyone that there is NO "housing bill" under discussion right now. Once FinReg passes, this whole thing will be put to bed. If we want a crack at them, now's the chance.

Furthermore, it's perfectly reasonable to suggest that a "Wall Street reform" bill should deal with the major cause of the Wall Street meltdown: the housing market. If housing prices had never dropped like they did, we'd never have had a crisis at all.

Posted by: MDA123 | May 4, 2010 10:07 PM | Report abuse

Look at the percentages of mortgages held by the taxpayer!
http://www.calculatedriskblog.com/2009/10/sf-fed-recent-developments-in-mortgage.html

It's simply wrong to say this "The immediate effect of reform will be felt in the housing market rather than the financial sector". If you stop buying new mortgages..the financial sector will be getting back into the mortgage business. I would estimate that to be a large impact.

Posted by: staticvars | May 4, 2010 10:12 PM | Report abuse

If they embrace Hensarling's bill, I'll take it seriously. But I'm not treating them unfairly here. This is, after all, their proposal, and if it's hastily thrown together, there's not much I can do about it. it's the closest thing to an official GOP statement we have.

Posted by: Ezra Klein | May 4, 2010 10:39 PM | Report abuse

@MDA123
You said: "If housing prices had never dropped like they did, we'd never have had a crisis at all."

I prefer, "If housing prices had never gone up like they did, we'd never have had a crisis at all."

The GSEs didn't make the prices go down, they put the foot down on the accelerator and drove them up, with Greenspan feeding them the low interest rate fuel.

Posted by: staticvars | May 4, 2010 10:49 PM | Report abuse

Officers from Fannie or Freddie said that housing prices were likely to fall if they were required to cut back on their lending. Therefore, saying that their mission is to make housing "More Affordable" is the opposite of reality, especially for people who are prudent savers rather than debt dependent. In the long run, housing would become most affordable if these entities did not exist. I acknowledge that the immediate shock of higher interest rates would make housing less affordable to a wide swath of purchasers in the short run.

Posted by: jeff86 | May 5, 2010 12:57 AM | Report abuse

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