KANSAS CITY, Mo. — Give credit to the Obama administration for acknowledging that Fannie Mae and Freddie Mac should be phased out. The Treasury offered three options for how to do that, but didn’t say which one it favored.
The refusal to choose was a signal that the debate will take a long time-perhaps a year or more. Meanwhile, Fannie and Freddie will continue winding down and decreasing their portfolios.
The Treasury report correctly acknowledged that the huge sums our politicians have plowed into housing-which receives far more government support than that available in many other countries-diverted investment from more productive uses. It also put taxpayers on the hook for nearcatastrophic losses.
Under the first and best choice proposed by Treasury, any government mortgage guarantee would be confined to limited programs such as those for lower-income buyers under the Federal Housing Administration, as well as for veterans under the Veterans Administration and certain farm programs.
As the Treasury report noted, this preferred choice would cause less economic distortion and allow more capital to flow to investments that create wealth, jobs and prosperity.
The second option would be an odd hybrid: a limited mortgage guarantee under a program that would supposedlyexpand in an emergency. How a small federal program would abruptly get big, and just at the right time, is a troubling question. The federal government isn’t exactly known for doing this sort of thing well. Nor would it stay small for long.
The third option would offer a widely available government mortgage guarantee, which would be doled out by an unspecified number of private, regulated entities. These would charge fees to supposedly cover the risks of the guarantee, as banks pay premiums to the government for deposit insurance.
But this option would replicate the root flaw in the Fannie and Freddie model: private entities profiting from a government guarantee, encouraging risky lending while leaving taxpayers holding the bag in a collapse.
The difficult, underlying issue is whether it’s time to phase out the highly popular 30-year fixed mortgage with payback option. If the goal is drawing private capital back to the mortgage market, and it should be, then the 30-year mortgage may have to become scarcer. Private investors are reluctant to assume that risk without a government guarantee.
In any case, the transition to a market free of Fannie and Freddie must play out over several years. The economy remains weak in large part because housing remains weak. If Fannie and Freddie are wound down too quickly, the result would be a significant blow to the economy.
Editorial, Pages 14 on 02/21/2011