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  • GSE Reform: Eliminate Fannie and Freddie, but Don’t Replace Them

    The President’s State of the Union address overshadowed some very important news relating to housing finance reform.

    Last Wednesday, Senators Bob Corker (R–TN) and Mark Warner (D–VA) promised to renew efforts to pass a bill they introduced in June 2013 that would close down Fannie Mae and Freddie Mac. It also appears that Senators Tim Johnson (D–SD) and Mike Crapo (R–ID), the Senate Banking Committee’s leading Democrat and Republican, will introduce a bill similar in approach to the Corker–Warner reform. This is serious cause for concern to all U.S. taxpayers.

    As Heritage analysts previously pointed out, the main problem with the Corker–Warner bill is that it would replace Fannie and Freddie with a new government entity that would make similar taxpayer-backed guarantees and serve as yet another federal regulator. In its current form, Corker–Warner would provide taxpayer coverage for 90 percent of the losses for holders of mortgage-backed securities, but this number will likely climb during the legislative process.

    Just as bad, Corker–Warner perpetuates the notion that lenders have a duty to serve all consumers and expand credit to markets underserved by the housing finance system. Corker–Warner would also provide affordable housing groups with a dedicated source of taxpayer dollars to fund their favored projects. If Crapo and Johnson borrow any of these policy ideas, their bill will be just as hostile to U.S. taxpayers as Corker–Warner.

    Ironically, the best course of action would be for Crapo and Johnson to heed what Senator Corker says rather than look to his bill. Corker recently referred to Fairholme Capital Management’s plan to purchase portions of Fannie and Freddie as a sign that private capital would return to the housing finance market. As reported by the Financial Services Roundtable:

    Mr Corker, a Republican, reiterated that the Fairholme plan proved there was an appetite for risk from the private sector.

    All Members of Congress should take Senator Corker at his word and focus on protecting taxpayers and getting private capital into the housing market. This means they should shut down Fannie and Freddie without providing a new taxpayer guarantee.

    Alissa Tabirian is currently a member of the Young Leaders Program at The Heritage Foundation. For more information on interning at Heritage, please click here.

    Posted in Economics [slideshow_deploy]

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