Politics, Reality Stand in the Way of Fannie and Freddie Reform

This is going to come as a shock to you, but it turns out that winding down government involvement in the housing market may be easier said than done.  An AP article by Alan Fram details some of the Congressional efforts being made to wind down the government sponsored entities Fannie Mae and Freddie MAC.

Fannie and Freddie were put under government conservatorship in 2008 to avoid their insolvency.  Together the GSEs have drawn about $150 billion in taxpayer money from the treasury as part of an ongoing bailout started under the Bush Administration and continued by the Obama Administration.  Austerity and budget-cutting have been in vogue since the last election cycle, and many politicians have targeted government housing programs (and the GSEs in particular) for funding cuts.  Several bills have been proposed toward this end, but their success is not assured:

“But House and Senate Republicans pushing bills to phase out both federally run companies are learning how fear, politics and old-fashioned lobbying can trump ideology. Even in the GOP-run House, leading proponents of doing away with Fannie and Freddie aren’t predicting victory. As a precaution, they’re advancing eight bills taking bite-sized swipes at the issue. In the Democratic-led Senate, a sister measure by 2008 presidential candidate Sen. John McCain, R-Ariz., faces long odds, and the Banking Committee’s top Democrat and Republican are wary of quickly reshaping the market for financing home purchases.”

Leading Republicans emphasize that there is no consensus on the issue – girding supporters for the possibility that efforts to wind down the GSEs may not succeed.  Many Republicans have expressed their desire to end or significantly reduce government involvement in the housing sector within the next five years – a goal that seems unlikely to be achieved if you consider just how large a role Fannie and Freddie play in housing finance.

The government backs or funds more than 90% of all mortgages originated over the past two years.  Presently there are not many private lenders who are willing to step up and take the place of Fannie and Freddie, at least not at the rates the GSEs offer.  Without the GSEs rates would likely rise, and credit could be even more difficult to get than it is already.  In the abstract, I feel that removing the government from housing finance is an idea that has some merit.  Practically speaking, it will have to be a slow process.  I’m thinking more along the lines of 20 years rather than 5 years.

While most Republicans are in favor of winding down Fannie and Freddie, there are some that feel such a move would destabilize the housing market:

“Many Republicans endorse that view[winding down the GSEs], and many lobbyists and congressional aides expect Hensarling’s bill to ultimately move through Bachus’ Financial Services Committee and the full House. But there are GOP pockets of resistance, chiefly from lawmakers worried about the practical impact of such a move, particularly in districts with high home prices and where the housing market remains especially weak.”

Although the GOP controls the House, the Democrats still hold a majority in the Senate, so these bills would likely meet resistance there.  Whether or not some sort of bipartisan compromise will be worked out remains to be seen.  I’m curious to know where you stand on the government’s involvement in housing finance.  Let me know where you stand in the comments section below.