Why Are Republicans Changing Their Tune on Fannie and Freddie?

One of the most common Republican battle cries over the past year has been to wind down government sponsored mortgage companies Fannie Mae and Freddie Mac (F&F). They played a major role in creating the housing bubble that led to the financial crisis. The taxpayers' loss on their rescue will exceed $150 billion, which is several times the cost of the rescue for the rest of the financial industry. Yet a new report indicates that Republicans might not be so eager to tear down F&F after all.

What has changed?

Actually, let's take a step back. What are Republicans actually saying now? The report comes from Alan Zibel from the Wall Street Journal. Here's an excerpt that helps to explain:

"We recognize that some things can be done overnight and other things can't be," said Rep. Scott Garrett (R., N.J.), incoming chairman of the House Financial Services subcommittee, which oversees Fannie and Freddie. "You have to recognize what the impact would be on the fragile housing market as it stands right now."

Contrast that attitude with this:

Republicans were backing a bill by Rep. Jeb Hensarling (R., Texas) to start cutting the government's ties to the mortgage giants or begin winding them down in two years; if they were deemed financially viable, they would become fully private within five years.

Essentially, they've gone from trying to quickly eliminate F&F to saying that a slower, more prudent approach is necessary. Clearly, something has happened to soften their once aggressive attitude.

They're No Longer the Opposition

When your party is in the opposition with a weak minority, it's very easy to talk big. You can tell Americans exactly what they want to hear without any consequences, because you can't actually pass any legislation. But now that Republicans are in a position to actually pass bills, they need to pay a little more attention to the consequences of their talking points.

During the lame duck session, we saw a new air of compromise. Republicans know full-well that there's zero chance that Democrats in the Senate or President Obama will go for a plan that seeks to wind down Fannie and Freddie in a few years. If Republicans want their housing policy goals to be achieved, they must figure out ways to compromise with Democrats. A longer time frame could work.

The Lobbyists Are Flocking

Of course, winning lots of seats in an election does something else for your party: it makes you a bigger target for lobbyists. And almost every lobbyist out there favors the government playing a major role in the housing market. When the government takes most of the risk, firms can enjoy the profits with little worry. Moreover, the real estate industry understands how disastrous it would be to the still-struggling housing market if F&F were quickly dissolved. There's little doubt that lobbyists are far more interested in talking to Republicans now that their actions will actually matter.

The Housing Market Deteriorated

But politics isn't entirely to blame. Republicans were most outspoken about F&F during the financial regulation bill debate. That effectively ended in early July when the bill passed. The re-collapse of the housing market really wasn't felt until after that. Up to July, it looked like the market had been steadily recovering. Much of the improvement was due to the home buyer credit, which distorted the market. Then foreclosuregate hit this fall.

At this point, the housing market is much more fragile than Republicans probably anticipated it would  be when they were hoping to begin winding down F&F. This means two things. First, the private market certainly isn't ready to step in and take over for F&F since there's still a great deal of risk and uncertainty clouding the housing recovery. Second, beginning to withdraw government support too soon could cause the collapse to be even worse -- which would also cause the losses to F&F, and consequently taxpayers, to be even more severe.

The Tune Hasn't Changed That Much

In reality, however, Republicans' views on F&F and housing policy in general haven't changed that much. Even though there might appear to be a significant policy shift above, there really isn't. Republicans still broadly want to do away with the F&F. Most of those calling for their swift dissolution were on the fringe, and some of them won't change their view. More moderate Republicans will merely shift their expectations for how long it will take. Saying that F&F should be completely eliminated over a 10 to 15 year period versus a two to five year period isn't really a change of philosophy, but a tweak in policy.

What They Must Do in the Meantime

Since F&F can't be eliminated overnight, Republicans need to take the next year or two as an opportunity to pave the way for a housing market that isn't dependent on the two companies. That means they need to begin changing regulations to encourage the private market to begin stepping into the market. The WSJ article mentions that one step in doing so might be to lower the mortgage size that F&F can guarantee. Private lenders might be more willing to take the risk for mortgage of wealthy borrowers with large down payments. Another step could be to change regulations to create a robust covered bond market in the U.S., which is something that Rep. Garrett was pushing for during the financial regulation debate.

If you pair this report with one from earlier this week that the Treasury is beginning to move to the center on housing policy issues as well, it's starting to look like a compromise could actually happen. That's somewhat surprising, as Democrats and Republicans have expressed very different views of the right direction for housing policy since the financial crisis. The coming debate might actually be substantive and lead to real changes after all.