For all the talk about reform of the mortgage finance system, the anticipated changes to Freddie Mac and Fannie Mae are likely to be rather modest. In the run-up to Secretary Geithner’s end-of-January deadline to offer a proposal to Congress, only two options are under serious consideration to support the goal of ensuring long-term liquidity of the market for mortgage credit.
Option one envisions a model akin to the present government sponsored enterprise (GSE) but with a tighter oversight regime to protect the explicit taxpayer guarantees. Option two is a privatized model with a tight oversight regime and no explicit guarantee of government protection. Arguably, not much difference when you consider that the major investment banks were private institutions with neither an implicit nor explicit guarantee of solvency, but they received a federal bailout via the TARP law anyway!
While there seems to be some general consensus that more aggressive and transparent oversight will help ensure liquidity of mortgage capital and prevent a repeat of the present foreclosure crisis, there is less agreement on whether Fannie and Freddie should be in the business of supporting and promoting housing for the vast population of those with modest incomes and limited access to market rate credit.
Limiting Fannie and Freddie to a mission focusing only on liquidity means that the President and Congress will be left to the task of setting and implementing goals for affordable housing and broad based access to credit for underserved citizens. Given the limited effectiveness of measures, such as the Community Reinvestment Act, which was designed to accomplish just such purposes, one can be forgiven for not putting much faith in Congress and the Executive.
Perhaps, if the lessons of this crisis are well-learned and if new accountability procedures are well crafted and properly enforced, a reformed Fannie Mae and Freddie Mac are exactly the institutions able to help meet the nation’s goals of decent and affordable housing for a large portion of the citizenry. Moreover, The National Housing Trust Fund already authorized in law and waiting funding through an invigorated earnings portfolio from the “reformed” GSEs, would certainly bring a measure of stability to the housing market. For evidence, see the hundreds of affordable housing trust funds that already exist and operate efficiently and effectively at the state and local levels.