The new year is not even a month old, but we may already have a contender for the very worst idea of 2011. Big banks are lobbying to take over where government-sponsored enterprises Fannie Mae and Freddie Mac left off, reports Louise Story in the New York Times. They want to be the ones to issue government guarantees going forward. This terrible proposal would essentially create a new housing policy framework just as toxic as it was under Fannie and Freddie.
What precisely does Story say banks are suggesting? First, banks assume that the government will continue to stand behind most mortgages in the U.S., as it has in the past. They think this because they've said that they won't stand for anything else. They have threatened to stop originating 30-year mortgages without a government guarantee in place.
So if the government does backstop mortgages, there just remains a question of who issues that guarantee against mortgages. In the past, Fannie and Freddie had this responsibility. We all know how that turned out.
The chances that Fannie and Freddie will survive housing policy reform are relatively slim at this point. They're pretty politically poisonous entities, and the public would likely be outraged if they continue to exist in a new form after their rescue, the cost of which is around $150 billion and rising. One possible scenario is for the GSEs to be wrapped up into a new government agency that issues mortgage guarantees and collects some insurance premium for federal backing.