With a $154 billion bailout of Fannie Mae and Freddie Mac thus far, and regulators estimating the need for billions more, lawmakers in Washington have finally begun debate on how to wind down these two failed mortgage giants. While there is widespread agreement that they must be eliminated gradually to avoid market disruptions, plans for what will replace Fannie and Freddie have not found similar consensus.
One plan has recently gained attention on Capitol Hill, not the least because it has emerged from a surprising source. In early May the typically small-government conservative Rep. John Campbell (R.-Calif.) teamed up with Rep. Gary Peters (D.-Mich.) to introduce the Housing Finance Reform Act, HR 1859, mirroring an Obama administration proposal released earlier this year. Campbell apparently believes that Fannie and Freddie simply provided the wrong kind of government support for the housing market, not that government support itself was the problem. Campbell’s mind-set is reminiscent of Friedrich Hayek’s book on the failure of socialism The Fatal Conceit. If we could just get the right kind of government support in place, we could continue to subsidize low mortgage rates and the 30-year fixed-rate mortgage while simultaneously protecting taxpayers from the risk of future bailouts.
This time, it will be different, he says. This time the government’s guarantee to mortgage investors would be explicit, and significant layers of private capital would stand as a buffer before taxpayer funds are used to prop up the market. Should losses occur on soured mortgages, taxpayers would chip in only after homeowners’ equity and the security issuers’ shareholders are completely wiped out and a special Federal Deposit Insurance Corporation (FDIC)-like reserve fund is entirely depleted. By building strong buffers and with careful regulation, taxpayers are sure to be safe, right?
Don’t be fooled…
The article continues at Human Events.
Read also at Americans for Prosperity, Kerpen to Financial Services Committee: Stop Delaying Fannie Mae / Freddie Mac Wind Down