What would happen if the federal government pulled out of the mortgage business? That’s part of the debate as the President and members in Congress talk about phasing out government-sponsored lenders Fannie Mae and Freddie Mac.
Tuesday, during a housing summit at the Bush Presidential Center, Congressman Jeb Hensarling, a Dallas Republican, harkened back to 2008 when the housing industry collapsed: homeowners defaulted on loans; banks suffered huge losses and quit lending; the American economy went into the tank.
Hensarling said a lot of that was Washington’s fault.
He said the participation of government-backed mortgage lenders Fannie Mae and Freddie Mac encouraged “loose”, risky loans because banks and credit companies believed the government would pick up the tab for buyers who were credit risks to begin with.
“Given their prominence in the market, investors and underwriters came to believe that if Fannie or Freddie touched a loan, it was safe, sound, secure and, most importantly, ‘sanctioned’ by the government,” Hensarling said, adding that more than 70 percent of the subprime and Alt-A mortgages that led to the crisis were backed by tax-supported programs.
Hensarling, chairman of the influential House Financial Services Committee, says taxpayers got stuck with the “mother of all bailouts,” nearly $200 billion of Fannie and Freddie debt.
Now Hensarling, like President Obama and members of both major parties, wants to phase out the two giant lenders over five to seven years and promote more privatization of the mortgage lending industry.
But how much privatization is the question.
The President and members of a national bipartisan committee still believe government should have some role in backing mortgage loans.
Former Housing Secretary Mel Martinez, a Florida Republican, said, “There needs to be a role for government but it should come after the private sector comes into the market.”
Martinez likes the idea of attaching a fee to each mortgage and putting the money in a government insurance pool. After private lenders incur a certain amount of loss the government could step in and help stem the bleeding.
But Hensarling, who’s promoting his mortgage reform bill known as the PATH Act, says government needs to get completely out of the home loan business.
“If, at the end of the day, taxpayers are still on the hook, then I fear all you’ve done is put Fannie and Freddie in the Federal Witness Protection Program, given them cosmetic surgery and a new identity, and released them on an unsuspecting public,” Hensarling said.
What all of this could mean to the survival of the 30-year fixed mortgage is a big question.
Hensarling says his legislation requires a 30- year mortgage be offered along with other home financing options.
But former U.S. Housing Secretary Henry Cisneros, who served under President Clinton, says banks would be reluctant to make loans for 30 years without some government guarantee.
“The result would be tighter credit, more difficult mortgage structures, higher down payments and in the final analysis fewer people having access to home ownership,” Cisneros predicted.
Hensarling’s legislation has passed in his committee and is expected to reach the House floor for a vote this fall.
Legislation in the U.S. Senate is more likely to include some government involvement in lending which means getting real change will depend on a congressional conference committee and a rare Washington commodity- compromise.