We've Nationalized the Home Mortgage Market. Now What?
The home loan market was nationalized in a slapdash fashion and is now riven by conflicts of interest and competing goals. To solve it, a consensus is forming to head down the path of the least resistance but greatest risk.
In February 2011, the administration issued a white paper outlining options to remake the American housing finance market, with three options to fix Fannie and Freddie.
Option 1: Largely privatize the market, unwind Fannie and Freddie and remove the government almost completely from the housing finance market.
Option 2: Provide some form of government guarantee for mortgages only in times of crisis.
Option 3: Restore Fannie and Freddie much as they were before the crisis, though with significant protections for taxpayers and with measures to attract private capital into the market.
Many criticize the Obama administration for not choosing one of these options. "Treasury punted," says David Min, a law professor at University of California 2014 Irvine. Phillip Swagel, a former official in George W. Bush's Treasury Department, called the lack of progress on the issue "a failure of the Obama administration."
Privately, the administration came to favor some version of Option 3. But after the Republicans took Congress in the 2010 midterm elections, the administration made a political calculation not to push any specific solution, according to several people familiar with the administration's deliberations.
The Republican Party, the thinking went, is split on Fannie and Freddie. One faction, the tea party and others with a free-market philosophy, want the government out of the mortgage market. Another is made up of small community bankers, realtors and local developers, who would like to see Fannie and Freddie restored to something resembling the way it was before in order to keep the mortgage market flowing and to allow smaller banks to compete with the giant firms.
The big banks make up a third faction. They would like to see the government's role limited to a guarantee. That would allow them to continue to dominate the mortgage origination business without contending with the market power of government-sponsored entities. Before conservatorship, Fannie and Freddie had enormous influence over what kinds of loans banks would offer, which had the effect of restricting bank activity.
Backing a specific plan would have united the opposition against it, the administration felt. "We had deep research on the subject and long, lengthy, fully baked recommendations," says a person involved in the efforts. "The view was any position we took was going to bring out attacks from conservatives and the anti-Obama-ites. It would have polarized the debate."
Democrats also blame Republicans for making intransigence their overarching tactic during the first Obama administration. "The political reality was there was no way to bridge that difference. Could Treasury and the administration have reached out more? Sure, but I'm not sure they would have gotten anywhere. And it would have given them [Republicans] something to be against," says Min.
For their part, Republicans say that the Obama administration didn't reach out to them to discuss options or hear their ideas.
And of course, Democrats have factions as well, though they are less pronounced. The progressive wing wants to push the government to make sure there is sufficient backing to make housing affordable for more families.
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