As housing finance policy proposals evolve, the question of reform becomes increasingly normative and less economic
How do you fix a $160 billion problem? Congress will face this question once the deficit deal is out of the way. It then must decide what to do with the troubled mortgage companies Fannie Mae and Freddie Mac. After the government seized the firms in 2008, the private market for mortgage financing shut down. At this time the government is purchasing or guaranteeing nearly all new mortgages. Nobody likes this result, and we're beginning to see some new bills that attempt to fix the problem. Determining which option is best might depend more on moral imperatives than economic theory.
The Treasury's Three Ideas
The Treasury waded into the debate in February when it provided three relatively aggressive alternatives to limit the government's role in housing finance. The first would only provide support for around 15% of the market, for low- to moderate-income borrowers. The second calls for a funding mechanism that comes to life only in emergencies like a credit crunch. The third would provide catastrophic guarantees on most mortgages, where private investors/lenders take the first loss on a loan-gone-bad.
The Treasury provided these options as possible ways to solve the problem, without committing to any one over another. That left Congress the opportunity to embrace them or ignore them altogether. Up to now, however, the only sweeping housing finance reform bills proposed remain in the earliest stage of the process, awaiting committee action.
Sammie Ram: Merging and Redefining Fannie Mae and Freddie Mac
One bill (.pdf) was proposed this week, sponsored by Rep. Gary Miller (R-CA). He hopes to wind down Fannie and Freddie and replace them with a new, single government agency to own and guarantee mortgages. He calls it the "Secondary Market Facility for Residential Mortgages." A fitting nickname might be "Sammie Ram" or "Sammie" for short.
Miller's bill puts an interesting spin on the debate. His background is in home building and his district lies is in the Orange County/Los Angeles, California area. As a result, he is very sympathetic to the realtor lobby, which strongly supports continued government support for the housing market. But it also has some conservative glimmers, attempting to ensure that the government's role doesn't become too broad.
So what would Sammie look like? First, it would be an explicit government agency -- not a quasi-private corporation like Fannie. The new agency's control of housing finance would be capped at 50% of the market, leaving the private sector to take on the rest. This limit could be relaxed in times of market distress, however. It would also focus on guaranteeing mortgages and would charge lenders a fee for this service to pay for any mortgages that incur losses. It would have reinsurance with the Treasury for any losses that exceed the value of its insurance fund.
Hoffin Gaes: At Least Five Mini-Fannies
An earlier proposal was offered in May by Rep. Gary Campbell (R-CA). Although Campbell doesn't have a background in the housing industry, he also represents Orange County, CA. His district was home to a couple of now defunct subprime mortgage companies like Ameriquest and New Century. He also supports continued government intervention in housing finance.
His bill, explored in detail here, would create at least five "Housing Finance Guarantee Associations." We'll nickname these "Hoffin Gaes" or "Hoffins" for short. Unlike Sammie, a these Hoffin would be a private firm. It would fund mortgages and would obtain a federal guarantee by paying the government a fee. In this sense, Hoffins would function like a bunch of mini-Fannies, except that the government guarantee would be explicit, instead of implicit.