For the clearest sign yet that U.S. housing reform is floundering, just take a look at the latest proposal. Two lawmakers, with industry lobbyists in tow, are heralding a union of Fannie Mae and Freddie Mac , which would leave the government still in charge. Even more than other ideas floating around, it would preserve the status quo. It only goes to show just how weak the political will is for a real fix.
The full details are still forthcoming but early reports hardly inspire much confidence. The newly created Frannie, as it were, would look a lot like the old government-sponsored entity framework. It would buy mortgages, package them into tradable bonds and, most significantly, come with a government guarantee. After pumping more than $160 billion into Fannie and Freddie, Uncle Sam should be seriously questioning guarantees, not embracing them.
Since being seized by the government three years ago, Fannie and Freddie have become even more important to U.S. housing. By propping up the market, this has terrified the real estate industry and consumer groups into thinking the disappearance of the GSEs would herald yet another downturn in home prices. That fear isn’t without merit. Fannie and Freddie, together with the Federal Housing Administration, are guaranteeing roughly nine out of 10 new mortgages and back roughly half the $10.6 trillion market.
But the debate needs to be far less myopic. Wringing out excesses, for one, will mean demand for home loans won’t return to the go-go days of yesteryear. That means the private sector could eventually shoulder a bigger share. Proposals should pave the wave for transferring risk back to where it belongs — the homeowner, the lender and other investors. Uncle Sam has already done more than his fair share.
The duration of the debate over Fannie and Freddie makes the path of least resistance — especially for politicians worried about re-election and other front-burner issuers like the deficit — ever more appealing. The proposal, from Representatives Gary Miller of California and Carolyn McCarthy of New York, crystallizes just what can happen when a crisis fades from view and indecision persists for too long. Few expect Congress to enact any legislation on U.S. housing reform until at least 2013 anyway. Sadly, that should make selling the status quo even easier.
Rep. Gary G. Miller (CA-42) and Rep. Carolyn McCarthy (NY-04) are expected to introduce a bill tomorrow to merge Fannie Mae and Freddie Mac, and restructure the company into a government-held corporation.
The legislation will propose that the merged company purchase mortgages and sell them to investors as securities that are government-backed. The new company wouldn’t operate for profit-making purposes and wouldn’t have shareholders.
Under the proposal, a five-member board would govern the corporation, and it would be regulated by the Federal Housing Finance Agency, which would ensure that its market share didn’t exceed 50 percent of the mortgage market.
Prudently underwritten loans with down payments of at least 20% to 25% don’t need a guarantee. “They only need the guarantee if they’re going to embark on low down payments,” he says. “That’s where the debate gets stalled.”
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