Dealing with Fannie and Freddie: The Right Approach v. the Wrong Approach
The Heritage Foundation is absolutely clear about what needs to happen to Fannie Mae and Freddie Mac, the two housing finance giants — or government sponsored enterprises (GSEs) — that left taxpayers on the hook during the housing market crash in 2008.
We’re talking about being on the hook for trillions of dollars here.
In the pre-GSE system, Fannie and Freddie, as quasi-private corporations, had the implicit backing of the federal government as well as the backing of private shareholders who stood to lose capital they had invested in companies.
The GSEs purchased mortgages from banks and then packaged them into mortgage-backed securities (MBS).
The GSEs then provided guarantees of principal and interest payments on these MBS, and markets generally assumed that taxpayers would pick up the tab if the GSEs got into trouble. If only a handful of mortgages backing a Fannie Mae MBS defaulted, Fannie covered investors’ losses out of its own profits. On mortgages that had down payments of at least 20 percent, Fannie covered all the losses. For those home loans with less than a 20 percent down payment, however, the GSEs required private mortgage insurance (PMI). PMI companies, in turn, were typically private insurance companies.
As long as the system was “normal”, taxpayers were never on the hook. But during the 2008 crash, the situation was not normal and taxpayers took the hit. As conservatives, we don’t want this to happen again.
You might be able to guess Heritage’s central policy recommendation. Fannie and Freddie need to go — meaning the government needs to get out of the housing market altogether — and they definitely need not return in a seemingly less risky reincarnated form.
But here’s the problem. Two senators, Sen. Tim Johnson (D-SD) and Sen. Michael Crapo (R-ID) 85%, have sponsored a bill that would “reform” the system in a way that would “barely change the public–private nature of the pre-crisis GSE system.” In other words, in the system their legislation would create, taxpayers remain on the hook during a crisis.
Instead of repeating the mistakes of the past, Heritage recommends Congress should:
- Adopt a policy that gets the federal government out of the U.S. housing finance market. Two good examples of such a plan are House Financial Services Committee Chairman Jeb Hensarling’s (R–TX) Protecting American Taxpayers and Homeowners (PATH) Act and Representative Justin Amash’s (R–MI) New Fair Deal Banking and Housing Stability Act.
Want to be off the hook for other people’s mortgages? Tell Congress you want them to enact the PATH Act.