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Recently, the House Financial Services Committee approved a bill introduced by Rep. Jeb Hensarling, R-Texas, that would liquidate mortgage giants Fannie Mae and Freddie Mac over the next five years. The bill, called the Protecting American Taxpayers and Homeowners Act, would restore competitiveness to the home mortgage market and return it to the private sector where it belongs by taking the government out of the business.
The idea of homeownership as a “right” that should be guaranteed by the government (read: the taxpayer) has been taking hold in America since Fannie Mae was established in the wake of the Great Depression. This perception exists even though, as FreedomWorks pointed out in 2008, government-sponsored entities like Fannie Mae do not actually have government backing — at least they aren’t supposed to, because providing such protection puts taxpayers at risk of backing trillions of dollars in loans. There was never supposed to be a problem for the taxpayer because housing prices would only go in one direction: up. That is, until they went down.
Still, Fannie and Freddie operated for years on the assumption of an “implicit” government guarantee. They backed risky loans to people who should not have qualified for them, creating the housing bubble-bust cycle that resulted in the 2008 recession. When the day of reckoning arrived, the two giants were deemed “too big to fail,” despite their role in the meltdown, and were bailed out on the taxpayer dime. By not allowing them to fail and not fixing the problems inherent in the market, the government rewarded their bad behavior and made the once implicit guarantee explicit, creating a true moral hazard.
Even after the bailout, Fannie and Freddie are unconscionably strong, holding or guaranteeing nearly 50 percent of outstanding mortgage debt in the nation. The two companies have cost U.S. taxpayers about $187 billion since their takeover by the federal government following the 2008 housing market collapse. If this epic boondoggle has taught us anything, it is that the housing market should be treated like any other market, and those who choose to participate in it — banks and borrowers, not taxpayers — must be subject to the same levels of risk. Government should not be backstopping winners and picking up the tab for losers in the marketplace.
There has been bipartisan agreement for some time that Fannie and Freddie need to be eliminated, or at least drastically reconsidered. It should be obvious to everyone now that government has no place in the home mortgage business. Rather than continuing to bilk the taxpayer, we need to restore the housing sector to the private sector. Hensarling’s proposed bill would do just that, allowing for near total privatization of the housing sector and creating a healthier, more sustainable and competitive mortgage market.
The PATH Act takes five major steps toward addressing the problem: 1. ending the bailout of Fannie and Freddie and phasing them out of existence; 2. narrowing the mission of the Federal Housing Administration to first-time and low-income borrowers; 3. promoting competition in the mortgage market; 4. enhancing transparency and consumer choice; and 5. breaking down barriers for private investment capital.
PATH isn’t perfect, but it’s a huge step in the right direction.