Finally, A Sensible Solution to Ensure Affordable Mortgage Rates

Many pundits and policymakers insouciantly throw around the idea that Congress ought to get rid of Fannie Mae and Freddie Mac. Sure, Fannie and Freddie have their fair share of warts — they became insolvent after buying bundles of loans, including exotic, high-risk, and undocumented mortgages that helped stimulate the housing crisis. But getting rid of them could have a devastating impact on housing prices and home ownership in the country.

Many pundits and policymakers insouciantly throw around the idea that Congress ought to get rid of Fannie Mae and Freddie Mac. Sure, Fannie and Freddie have their fair share of warts — they became insolvent after buying bundles of loans, including exotic, high-risk, and undocumented mortgages that helped stimulate the housing crisis. But getting rid of them could have a devastating impact on housing prices and home ownership in the country.

The reason? Fannie and Freddie, along with FHA, have an overwhelming presence in the housing marketplace — they guarantee about 90% of all home loans.

The two entities work behind the scenes to help keep your interest rate payments lower than they might otherwise have been by buying mortgages from primary lenders, such as your local bank. This is called the secondary mortgage market, and the system provides capital to your local bank so it can offer mortgages at lower costs to more qualified buyers.

So it isn’t realistic to talk about closing down Fannie and Freddie. Now is the time for somebody to come up with a real solution. 

Somebody has. Reps. Gary Miller (R-Calif.) and Carolyn McCarthy (D-N.Y.) introduced bipartisan legislation earlier this month to replace Freddie and Fannie. Called the Secondary Market Facility for Residential Mortgage Act of 2011 (H.R. 2413), the bill offers a comprehensive strategy for reforming the secondary mortgage market and provides the federal government with a continued role to ensure a consistent flow of mortgage credit in all markets and all economic conditions — good and bad.

That’s important. Although private lenders are necessary for a healthy market, having private capital — i.e., Wall Street — as the sole source of housing finance could result in a system dominated by a few large banks that are “too big to fail” at the expense of consumers. And without a federally backed system, banks could withdraw from the market in tough times, like they did during the housing crisis.

Unlike the two organizations today, the proposed entity would have no shareholders. Some groups, like the NATIONAL ASSOCIATION OF REALTORS®, believe having shareholders pushed Fannie and Freddie to overreach for growth and dividends.

Finally, the proposal spells out plans to protect taxpayers and ensure safety and soundness through appropriate regulation and underwriting standards.

This bill isn’t perfect, but it’s an honest and bipartisan effort to stabilize the housing market and help get our economy moving again. And for that reason, I think the two sponsors deserve a round of applause. 

What do you think of this proposed plan for replacing Fannie Mae and Freddie Mac?