Want to improve the housing market? Evict Fannie Mae and Freddie Mac. It sounds harsh, but without such a serious, drastic step, the market won't get better anytime soon. The value of household real estate is down an eye-popping $6.6 trillion (that's 12 zeros, folks) since it peaked in 2007. The "government sponsored enterprises" (GSEs) known as Fannie and Freddie played a big part in inflating the housing bubble.
They carelessly issued mortgage-backed securities with a government guarantee and then bought more of them as "investments," thus stoking the fire on an overheated market.
Before the housing collapse, Fannie and Freddie controlled much of the nation's residential mortgage market. Since then, both companies have gone belly up. Only massive infusions of federal funds keep them alive.
Wait, you may ask, didn't Congress pass a big financial-reform bill last year? Yes, it began life as a proposal that President Obama called a "sweeping overhaul." Although it ran as long as 1,300 pages, the Dodd-Frank bill overlooked Fannie and Freddie entirely.
That doesn't mean lawmakers were unaware of the Fannie-Freddie problem. "This is a big, massive bill as it is," Sen. Mark Warner, Virginia Democrat, said at the time. "We'll come back next year and take on Fannie and Freddie in a more thoughtful way."
Well, it's next year. There are several legislative proposals out there to deal with Fannie and Freddie. Unfortunately, few are thoughtful.
Take the idea of creating dozens of new GSEs, as one bill would do. That would only make matters worse. We'd be setting ourselves up for future bailouts, on top of the ones Fannie and Freddie already have received. We'd be practically guaranteeing the loss of hundreds of billions of dollars in taxpayer money.
The outlook isn't all dim. Rep. Jeb Hensarling, Texas Republican, and Rep. Scott Garrett, New Jersey Republican, are working hard to eliminate them, but they need more help. The two GSEs are now in "conservatorship," with the government acting as their monetary caretaker.
What needs to be done, according to financial analyst David John, is to move them to formal bankruptcy. Their perpetual charters should be revoked and replaced with three-year charters that Congress can renew if need be. Their portfolios of mortgage investments can be turned over to a new, temporary subsidiary of the Federal Housing Finance Agency for gradual liquidation.
Over time, then, all low-income housing goals and subsidies should be moved to the Department of Housing and Urban Development. Congress can evaluate each individually and decide what to keep and what to reject. Meanwhile, the remaining parts of Fannie and Freddie can be sold to private entities.
Let me be clear: Fannie and Freddie should not be abolished overnight. To ensure no further disruption to a still-weak housing market, it should be achieved gradually. But it must be done, not dragged out indefinitely.
It may be hard to imagine a housing market without Fannie Mae and Freddie Mac, but they haven't been around forever. Fannie Mae dates back to the Great Depression. It was chartered in 1938 to buy mortgages from banks so that those banks could underwrite even more housing loans. Freddie Mac came along much later.
The idea, of course, was to encourage more housing loans. Over time, though, this mortgage-purchase program grew and grew, until it became a secondary market for mortgages. Fannie and Freddie finally got to the point where they were controlling much of the market. Because they were operating with at least an implicit government guarantee, they had the ability to borrow at artificially low rates.
When the housing bubble burst, Fannie and Freddie were guaranteeing repayment on billions of dollars worth of mortgages, so they were on the hook for huge losses. To keep the whole mortgage market from collapse, Uncle Sam had to step in.
We need to turn over housing to the private sector, and there is only one way to do that: Fannie and Freddie have got to go. They're eating us out of house and home.
Ed Feulner is president of the Heritage Foundation (heritage.org).
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