Obama’s Grand Housing “Reform” Plan
The beltway press is humming now that Sen. Tim Johnson (D-SD) and Sen. Michael Crapo (R-ID) 82% have completed their bipartisan bill to eliminate Fannie Mae and Freddie Mac. But just because a proposal is bipartisan doesn’t mean it is worthwhile. Such is the case with Johnson-Crapo, which gives President Obama and his big-government allies what they want: explicit government guarantees in the housing markets along with new and improved affordable housing goals.
Reports indicate Johnson-Crapo is essentially a reworked version of the Corker-Warner bill introduced last June, and that’s bad news for Americans. Both of these Senate bills create a new government entity to explicitly back at least 90 percent of mortgage losses. So Fannie and Freddie will disappear, but the Federal Mortgage Insurance Corporation (FMIC) will take over their guarantees.
Under the system envisioned in the Senate, investors won’t have to worry about whether the government will protect them – they’ll know exactly what level of protection to expect. It is true that picking up 90 percent of the losses is a better outcome for taxpayers than picking up 100 percent of the losses, but is that the best conservative lawmakers can do? Lower taxpayers’ losses by 10 percentage points?
The Senate bills maintain almost the same level of moral hazard that exists in the current system and lets investors set prices to cover the portion the government won’t pick up. The whole problem with bailouts is that they allow managers to ignore financial risks. In the long run, the economy ends up with more risk because managers (and investors) are willing to take bigger gambles.
Ignore the spin claiming Johnson-Crapo represents bold reform proposals. The sad reality is that it would barely change the current system. In fact, Johnson-Crapo (just as Corker-Warner) goes even further with its subterfuge by formally eliminating the affordable housing goals but renaming those as well. Rather than having specific targets for various groups of borrowers, both Senate plans give financial institutions a legal duty to serve all markets.
Under the affordable housing goals, the aim was to water down underwriting standards to make sure virtually anyone, regardless of how bad a risk, could take out a home loan. If those borrowers defaulted, taxpayers should pick up the tab. Under the new duty to serve, the idea is exactly the same (except that now borrowers who can’t repay their loans can sue their banks).
The new system is worse than the old system. Explicit taxpayer backing. New versions of the affordable housing goals. A new federal regulator.
Don’t expect conservatives to sign on to President Obama’s grand housing plan.