Senators Corker and Warner have penned proposed legislation to reform Fannie Mae and Freddie Mac and the housing finance market more generally. This is a very important task that has been too long delayed and it is therefore encouraging to see a serious proposal with some good ideas in it. We have to find a sensible way to reduce the government’s role in the housing market while ensuring that the market works even in uncertain times and that subsidies are properly directed to those groups that warrant the help. The good news is that there are many excellent ideas for how to do that and a strong degree of consensus among policy analysts about the goals, including focusing any subsidies more narrowly on those in need. (See the materials from Brookings’ conference of January 2011 and the subsequent Brookings book, The Future of Housing Finance, containing the papers from that conference).
The bad news is that I do not expect serious action anytime soon. We remain caught in the trap that politicians want some way to provide broad financial aid to the housing market, which is very popular with the middle class and with all the lobbies associated with housing and finance, without having the subsidies show up on the federal budget and therefore in the deficit figures. Fannie and Freddie were very popular in Congress not just because of their extensive donations and other forms of help to politicians, but because they allowed politicians to square the circle by providing major subsidies to housing through implicit guarantees that reduced Fannie and Freddie’s borrowing costs without budget transparency.
Now that the financial crisis and ensuing severe recession have focused attention on the potential cost of implicit guarantees, it will, thankfully, be harder to use a similar hidden approach. (Explicit federal exposures already add up to quite a sum. My book, Uncle Sam in Pinstripes, details the roughly $10 trillion in federal guarantees and loans going to the private sector – a lot of which goes to the housing sector). That will mean more of the subsidy costs will show up on the federal budget or be charged explicitly to someone, which will be a lot harder to manage politically, especially in these deficit-focused times. Eventually we will find a compromise, but I fear it may be some years still until the political calculus can be solved.