This post was originally published in The New York Times’ Economix Blog. To view the original post, click here.
In the current housing financing system, shareholders and management of Fannie Mae and Freddie Mac got the considerable profits in good times, and when the housing market collapsed, taxpayers were stuck with the bill — a $190 billion tab in the recent crisis.
A Senate proposal for a new system would have private investors rather than taxpayers take on most of the risks and returns involved with mortgage lending — if a misguided obsession with the small additional cost to borrowers doesn’t sink the reforms.
The proposal put forward recently by Senators Tim Johnson, Democrat from South Dakota, and Michael Crapo, Republican from Idaho, who lead the Senate banking committee, would bring about a housing finance system driven first and foremost by market incentives rather than by government dictates. There are many pieces to the proposal, including support for affordable housing and an innovative approach by which to reward financial firms that serve a broad range of customers and penalize those that do not.
But reducing the government involvement in housing finance and bringing back private capital is at the heart of the bill, which would end the anomalous situation in which the housing finance giants Fannie Mae and Freddie Mac are private companies that earn enormous profits but remain under the control of a government regulator.