- - Monday, April 28, 2014


Nationalizing health care, which represents one-sixth of the economy, has been nothing short of a disaster. Nearly everyone recognizes that, but Congress hasn’t noticed. The Senate will vote Tuesday to establish a permanent federal presence in housing, which represents another one-sixth of the economy. Government manipulation of the housing sector was one of the primary causes of the Great Recession, and an Obamacare-style takeover will make things worse.

The disaster in the making is the bipartisan proposal of Sens. Tim Johnson, South Dakota Democrat, and Mike Crapo, Idaho Republican. It appears to lend the appearance of needed housing-market reform, but Johnson-Crapo is actually as crappy as Fannie Mae and Freddie Mac, the government sponsored enterprises that Americans spent $189 billion to bail out. This was the biggest of all the government bailouts, far surpassing bailing out Detroit automakers and Wall Street financial firms. It’s money we’ll never see again.

Johnson-Crapo would replace the signs on the Fannie and Freddie offices with a sign on a new government bureaucracy, the Federal Mortgage Insurance Corporation. A change of signs, alas, does not a reform make, and is good news only for the sign painters. Fannie and Freddie, quasi-private entities, have been backing mortgages with the implicit promise that the federal government would pick up the tab for the losses. This generous foolishness is what spurred the housing industry to build and expand with abandon, secure in the knowledge that taxpayers would absorb the risk if anything went wrong, which everything promptly did.

Fannie and Freddie were an open invitation to bad behavior, inviting speculators to reap the rewards with none of the risks. Johnson-Crapo preserves the crap, making the implicit explicit, replacing two mortgage giants with one enormous federal agency to back 90 percent of losses. As the new regulator in town, the Federal Mortgage Insurance Corporation would set underwriting standards for home loans, ensuring politicians ready access to favors they can dispense to friendly constituencies.

The legislation would repeal existing “affordable housing” programs and replace them with something a lot worse. Section 501 of the bill imposes a 0.1 percent tax (or “10 basis points” in banking lingo) on the balance of all outstanding loans to subsidize government housing with a $4.4 billion annual welfare program, a substantial increase over current law. After regulators decide where certain people aren’t receiving “equitable access” to loans, they’ll require mortgage providers to lend to people who, by the numbers, don’t qualify. That’s when the freebies start flowing. This is the same lack of thinking that caused the housing market to crash just a few years ago.

Fortunately, in the House, Rep. Jeb Hensarling of Texas, the Republican chairman of the Financial Services Committee, has a better idea. He would get rid of the disastrous Fannie-Freddie guarantee model once and for all. Mr. Hensarling says markets should decide the proper terms, pricing and availability of mortgage credit.

Lenders and investors would be responsible for understanding and managing their own risks, just like any other industry managed by grown-ups. They would have to be careful because the taxpayers wouldn’t be available to pay for the mistakes of lenders.

Under the House alternative, the government would continue to play a role in housing through mortgage insurance offered by the Federal Housing Administration, and the explicit government guarantee of Ginnie Mae, the agency’s loan “securitizer.” This solution would be more transparent, and force the market to act with discipline. We should not repeat the mistakes of Obamacare, to eliminate government-sponsored volatility in the housing market.

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