Congratulations, taxpayers, you’re getting a new house — whether you want it or not. When it comes to the American real estate market, after all, extensive government involvement (Fannie Mae and Freddie Mac back about 60 percent of new mortgages) means we’re all co-signing on our fellow citizens’ loans. And if the new head of the Federal Housing Finance Agency (Fannie and Freddie’s regulator) has his druthers, it’s going to stay that way.
In a recent speech at the Brookings Institution, former North Carolina congressman Mel Watt, who took over the reins of the FHFA earlier this year, signaled an alarming about-face in the agency’s priorities. Breaking with his predecessor, Edward DeMarco, Watt announced, “I [auth] don’t think it’s FHFA’s role to contract the footprint of Fannie and Freddie.” His alternative agenda: fighting off calls to require larger down payments or restrict the size of the loans that Fannie and Freddie will guarantee. In other words: keeping lending standards as loose as possible.
It was precisely this tendency to enable easy credit that was partially responsible for the inflation and subsequent popping of the real estate bubble in the last decade. For that reason, Mr. DeMarco saw it as his responsibility to rein in lending excesses. Now Mr. Watt seems anxious to open the floodgates once more.
You would’ve thought that the $187.5 billion taxpayer bailout that Fannie and Freddie required would have provided all the caution necessary to keep Washington from going down this road again. Deterrence is difficult, however, when politicians get all the credit for expanding homeownership and assume none of the liability for the deals that go bad.
Mr. Watt claims that the private sector is not yet strong enough to take over the government’s role in real estate markets. We suspect that, by his standards, that will always be the case. Private markets would price these transactions on the basis of risk rather than on the political calculations that have for so long guided Fannie and Freddie’s decision-making. That would likely mean stricter standards and fewer home loans. Such outcomes, while they may be economically sound, are unsatisfactory for a political class intent on goosing home ownership statistics.
Government has played far too large a role in the housing market for far too long. Only rational, market-based lending standards can check the excesses that precipitated the crash of the last decade. We encourage Mr. Watt to rethink his policy agenda, which runs the risk of reinflating the housing bubble. And we encourage members of Congress to finish the long-overdue work of winding down Fannie and Freddie and placing the mortgage market back where it belongs — in the hands of the private sector.
Reprinted from the Orange County Register