Building a New Era of Housing Finance
The private sector, not the government, should take initial losses
August 13, 2013
No one can truly believe our current system of housing finance is acceptable. The twin "government sponsored enterprises" Fannie Mae and Freddie Mac have been in a state of legal limbo called "conservatorship" ever since they were bailed out by taxpayers in 2008. The housing market is recovering, yet private sector investment in mortgages is still sidelined due to Fannie and Freddie's dominance in the market. In 2012, almost eight out of 10 loans made in our country came with an explicit government guarantee from either Fannie or Freddie.
The current system not only stifles innovation and contributes to stagnation, it leaves the taxpayer on the hook if things go wrong. With housing contributing so much to GDP, this is not good for our economy. And it's inexcusable that the private sector, which benefits from the government guarantee, wouldn't be the first to take losses.
A year ago, we set out to answer the question: how do we build a build a better system of housing finance for the future? The resulting legislation is the "Housing Finance Reform and Taxpayer Protection Act," which is sponsored by a bipartisan coalition of five Democrats and five Republicans from the Senate Banking, Housing and Urban Affairs Committee.
Our bill would bring in a new era of housing finance. Mortgage credit would remain available for qualified borrowers, but we would require the private sector to take significant losses before the government acts as a catastrophic backstop. In this capacity, the federal government guarantee remains in place, but in a more limited, responsible form.
The presence of a federal backstop helps our economy access the global capital markets, which in turn helps keep interest rates low. We also take steps to ensure community banks and credit unions can still compete for consumers' business. All of this forms the foundation for a stronger housing market and a stronger 21st century economy.
We have had five years to learn the lessons of the financial crisis and have the benefit of half a decade of hindsight. Economists, industry participants, many policy makers, and now the White House agree: now is the time for housing finance reform.
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