Despite the overwhelming evidence provided by Fannie Mae and Freddie Mac that mortgage guarantees can be a very dangerous business, they continue to remain the "solution" to the future of housing finance Congress leans towards. In a House Financial Services Committee hearing today, of the nine witnesses testifying only one explicitly speaks out against some form of federal guarantees. Meanwhile, seven say they're the best answer and one remains agnostic.

Who are these witnesses? They include

  • A mortgage banker (Mr. Michael J. Heid, Co-President of Wells Fargo Home Mortgage and Chairman of the Housing Policy Council of The Financial Services Roundtable)
  • 2 financial services lobbyist (The Honorable Kenneth E. Bentsen, Jr., Executive Vice President, Public Policy and Advocacy, Securities Industry and Financial Markets Association, Mr. Tom Deutsch, Executive Director, American Securitization Forum)
  • 2 business school professors (Phillip L. Swagel, McDonough School of Business, Georgetown University; Susan Wachter, The Wharton School, University of Pennsylvania)
  • An affordable housing advocate (Mr. Michael Bodaken, President, National Housing Trust)
  • An economist think-taker (Mr. Christopher Papagianis, Managing Director, Economics21)
  • An real estate investor (Mr. Michael A.J. Farrell, Chairman, Chief Executive Officer and President, Annaly Capital Management, Inc.)
  • A former Fannie Mae credit officer (Mr. Ed Pinto, Real Estate Financial Services Consultant)

Can you guess which one is against government guarantees? The only one with actual experience with them: former Fannie Mae credit officer Ed Pinto. The economist doesn't take a stand, but outlines the pros and cons. The banker, investor, lobbyists, academics, and affordable housing advocate all favor the government guarantees. The only witness who speaks against guarantees also happens to be the only one who has seen them in action first-hand.

From this, it looks pretty clear that the panel only included Pinto to humor the opposition. The make-up of the panel it chose makes clear that Congress has already made its decision. It believes that ensuring broad homeownership is an essential role of the government, despite its recent failure to do so responsibly. From a political standpoint, this makes perfect sense. Policymakers then keep both financial lobbyists and advocates for affordable housing happy. Meanwhile, taxpayers won't notice the cost they're being left with -- until once-in-a-hundred year events occur like we saw in the financial crisis. Once that tail risk is realized, a federal bailout will occur for a few hundred billion dollars, and the cycle will repeat again.

The rationale for the need of government guarantees is the usual line: the mortgage market simply can't exist effectively without them. That is, unless you consider that no other country in the world relies on government guarantees as the foundation for a functional mortgage market.

The reasons against government guarantees are pretty straightforward and very difficult to refute. First, the government can't be sure it's pricing the insurance properly, so eventual losses will likely be inevitable. Second, political pressure will force the government to charge too little for mortgage insurance, resulting in taxpayers subsidizing the market. That's precisely what we saw happen through Fannie and Freddie.

From the witnesses chosen, it's clear that the purpose of the committee hearing not so much to determine the fundamental structure of the government's role housing finance going forward. There's little debate among the panelists on that. Instead, they will likely try to begin to work out the details of how to implement federal guarantees. Though no such framework can promise taxpayers will be free from risk, certainly some are better than others.

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