Steven Senne, Associated Press
America's favorite mortgage, the 30-year fix with its low monthly payments and the ability to refinance if rates drop, would become a rare bird on the American financial landscape if Edward Pinto had his way.
Five years after the housing crisis, monster mortgage brokers Fannie Mae and Freddie Mac, the two semi-public for-profit corporations taxpayers spent $200 billion rescuing, remain under direct federal control.
Ninety percent of new mortgages today are still issued or guaranteed by those two entities, leaving many to wonder if root causes have been or ever will be addressed.
The most prominent vehicle for fixing the housing market at the moment is a bill that would eliminate Fannie and Freddie while creating new rules to rein in risky lending and borrowing. The bill, proposed by Sen. Mark Warner (D-VA) and Sen. Bob Corker (R-TN), has recently gained strong bipartisan support.
Already 10 of the 22 members of the Senate Banking Committee have cosponsored it, with equal numbers from both parties.
The Corker-Warner proposal steers a middle ground between consumer demands for affordable loans and taxpayer protections against future bailouts, shifting much of the risk of mortgage loans back to the private sector. But at the same time it creates a new system of guarantees to ensure that the market will provide the loans consumers expect.
The proposal’s basic principles have been endorsed by think tank economists, industry leaders and even the White House. “For too long these companies were allowed to make huge profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag," President Obama said in August of Fannie and Freddie. "It was 'heads we win, tails you lose.'”
But committee leaders from both parties have not yet put their fingerprints on the proposal, and when the Senate takes it up this fall, many expect key provisions to be watered down.
Politics over markets
Any more watering down would leave very thin soup, according Pinto.
The greatest indicator that the bill is not serious, in Pinto’s view, is that Corker-Warner seeks to guarantee the survival of the 30-year mortgage, which Pinto calls an "unnatural instrument.”
Without government-backed entities buying up and guaranteeing those loans, says Pinto, an economist at the American Enterprise Institute, they would be very unattractive to investors. In Canada and much of Europe, freely prepayable, long-term and fixed mortgages are rare. Much more common are "rollover mortgages," where the rate is adjusted every 5 to 10 years.
Pinto likewise argues it was politics, not markets, that led to the housing bubble and the subsequent crash in 2008, spurred in large part by government encouragement of high risk loans aimed at overstretched borrowers.
And it is political pressure, he argues, that is keeping politicians from addressing the roots of the housing crisis.
The Corker Warner bill would phase out Freddie and Fannie, removing that threat of private gain on the back of public risk. It would re-create a private mortgage market that disappeared in 2008, putting a chunk of private capital at risk before taxpayers would be on the line. But the bill would also try keep mortgages affordable for middle- and lower-income families by maintaining ultimate government guarantees, creating a Federal Mortgage Insurance Corporation that would regulate and collect and maintain insurance fees.
For better or worse, the 30-year mortgage would survive under the Corker-Warner regime.