Treasury to Punt on Fannie and Freddie Plan

More

In his options for scrapping the rescued mortgage companies, Obama deflects political heat--with some risk.

590 treasury cliff1066™ flickr.jpg

There are two smart political play calls in the Obama administration's forthcoming proposals to tame the mortgage mess at Fannie Mae and Freddie Mac. There's also an obvious opportunity cost, policy-wise, and a risk to the domestic economy that is bigger than any election cycle.

The three options the Treasury Department will recommend to Congress on Friday, as described by an administration official speaking on condition of anonymity, will all phase out Fannie and Freddie as we know them. That's smart call No. 1. Because they saddled taxpayers with an estimated $142 billion to $259 billion in bad loans when the government took control of them during the financial crisis, Fannie and Freddie have become magnets for criticism from tea party activists and Republican lawmakers. President Obama's leading argument to Congress is, let's get rid of them.

Smart call No. 2 is the three-item menu the administration is offering Congress for mortgage-market life after Freddie and Fannie. One of the choices would remove government entirely from the business of backstopping home loans. The middle choice is a limited government guarantee, which lawmakers could broaden in the event of another housing collapse. Option Three amounts to a full government mortgage guarantee.

By offering choices, and not a single, preferred policy, the administration avoids tying itself to a "Big Government" plan that could upset fiscally conservative swing voters, or to a "no government" plan that angers Obama's base. More importantly, it pits the tea party and free-market-think-tank wing of the Republican Party, which opposes government guarantees, against some traditionally big GOP donors in the housing industry, Realtors and home-builders, who could have a lot of money riding on guarantees or a lack thereof.

Politically, it's a punt. Obama is forcing congressional leaders, including top Republicans in the House, to share the heat over whether or not the feds belong in the mortgage game. He's also forcing interest groups--builders, realtors, free-marketeers, and fair-housing advocates--to put a lot of lobbying muscle behind their preferred plans.

"There's a question [of] whether the debate was ripe yet," said Sarah Rosen Wartell, a housing expert and executive vice president at the liberal Center for American Progress. "And if the president was to come out with a blueprint about what should go forward, he would emerge as a focal point" for all criticism.

What the administration gives up in the process is a chance to drive the debate. If Treasury officials really believe the government must play some role in backstopping home lending, they've lost perhaps their best chance to make that case. If they really want the government out of the way, they've lost a chance to seal what would be a major political deal with conservatives.

The biggest risk isn't political, however, it's economic. The housing market remains the weakest link, by far, in a national recovery that is strengthening by the day. Building activity has stagnated, prices have plunged, and the construction sector, in particular, has suffered the consequences.

The private sector has essentially fled the residential mortgage market; some 95 percent of new home loans are owned or backed by Fannie and Freddie. Many economists and housing experts worry that if Fannie and Freddie are phased out too quickly, or if no backstop remains when they disappear, the market will crumble further. Qualified buyers could find loans only sporadically available, or prohibitively expensive because of added insurance against default.

Other economists worry that a permanent guarantee will incite too much risky lending again, setting the stage for another bubble and crash.

It may be that what the market and the administration are looking for is time. The menu approach seems geared toward a belief that Congress will take a year, or years, to agree on a phase-out plan for Fannie and Freddie. In the meantime, the entities will slowly trim their portfolios--a process that's already in motion--and make room for private capital to trickle back into the home-loan business. It's as if Team Obama is following one of football columnist Gregg Easterbrook's immutable laws of the game: Kick early, go for it late.

(Image Credit: flickr/cliff1066™)

Jump to comments
Presented by

Jim Tankersley is a correspondent (economics) for National Journal.

Get Today's Top Stories in Your Inbox (preview)

The Remote Warehouse Where Confiscated Wildlife Ends Up

A government facility outside of Denver houses more than a million products of the illegal wildlife trade, from tigers and bears to bald eagles.


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Is Wine Healthy?

James Hamblin prepares to impress his date with knowledge about the health benefits of wine.

Video

The World's Largest Balloon Festival

Nine days, more than 700 balloons, and a whole lot of hot air

Video

The Origins of Bungee Jumping

"We had this old potato sack and I filled it up with rocks and dropped it over the side. It just hit the water, split, dropping all the stones. And that was our test."

Video

Is Trading Stocks for Suckers?

If you think you’re smarter than the stock market, you’re probably either cheating or wrong

Video

I Spent Half My Life Making a Video Game

How a childhood hobby became a labor of love

Writers

Up
Down

More in Business

Just In