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  • Obama: End Fannie and Freddie, but Keep Government in Housing Business

    Camilla Zenz/Zuma Press/Newscom

    Camilla Zenz/Zuma Press/Newscom

    President Obama lent his voice today to the growing consensus in Washington that federally sponsored housing giants Fannie Mae and Freddie Mac must go.

    While this is a welcome stance, he also called for new government guarantees for the housing finance market, which would only perpetuate the dangerous taxpayer subsidy that helped lead to the housing crisis in the first place.

    The speech comes nearly five years after federal taxpayers bailed out the two housing government-sponsored enterprises, Fannie Mae and Freddie Mac, providing some $154 billion in funds that are only now being repaid. The President promises an end to the “business model” that led to the collapse, calling for Fannie and Freddie’s investment portfolios to be wound down at a rate of 15 percent per year, stating that “private capital should take a bigger role in the mortgage market.”

    He is right. Broad government guarantees that shifted risk of defaults away from private investors put homeowners and taxpayers at substantial risk, leading to excess debt and leverage to flow to real estate, and instead of protecting against catastrophes in the system, made them more likely.

    But the President went on to call for government reinsurance of mortgage securities, payable after private capital is exhausted. Such reinsurance would ostensibly be priced so as to be self-funding. But if a reinsurance guarantee is self-funding, then why is the government needed? This new government guarantee would, like the present system, put taxpayers at risk and weaken the incentives to lend wisely.

    The President does make some other recommendations that are worth pursuing, such as reducing red tape for mortgages and reducing local regulatory barriers to new housing development. But these nods to rolling back government barriers to housing are swamped by calls for expanded government. Obama calls for new funding for homeowner refinancing, money for refurbishing vacant properties and “greening” of blighted properties (including a “sizeable” amount for Detroit), new subsidies for rental housing, and funds for programs for the homeless. This wish list of new spending not only threatens taxpayer wallets but distracts from the focus on fixing housing markets.

    The President has moved the housing debate forward, primarily by joining the call for an end to Fannie Mae and Freddie Mac. Instead of replacing Fannie and Freddie with new federal programs, subsidies, and guarantees, the debate should be centered on establishing a free and fully functioning private housing and housing finance marketplace.

    Join @Heritage on Twitter and ask President Obama a question about housing. He’s taking questions on Wednesday at 1 p.m. ET. Ask him a question on Twitter, YouTube, Instagram, or Vine with the hashtag #AskObamaHousing or on Facebook here.

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