Limbo. That’s the word most people use to describe the state of affairs in a critical part of our economy — housing finance. The government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, which were nationalized almost five years ago with the seemingly noble goal of eventually getting rid of them, now back some 90 percent of American mortgages. So much for good riddance!
But talk of reform finally seems close to action. Senator Bob Corker (R-Tenn.) and Senator Mark Warner (D-Va.) have proposed a bipartisan bill called, appropriately enough, Corker-Warner. Meanwhile, the House Financial Services Committee, led by Representative Jeb Hensarling (R-Texas), has produced its own bill, the more grandiosely entitled Protecting American Taxpayers and Homeowners, or PATH Act. Last Tuesday, during a speech in Phoenix, President Barack Obama weighed in. “Private lending should be the backbone of the housing market,” the president said. That same day there was also a housing policy forum at the George W. Bush Presidential Center in Texas, where, among others, Hensarling spoke.
Everyone (well, almost everyone) seems to agree with the president: Private lending should be the backbone of the housing market. But just how much private capital does that entail? Hensarling and most of the Republicans think the government should get out of the game entirely. American Enterprise Institute scholar Peter Wallison, a long-time critic of the GSEs, recently wrote a piece in the Wall Street Journal entitled “Competing Visions for the Future of Housing Finance,” in which he called any remaining government presence “faux reform.”
Corker and Warner (and Obama) want the government somewhat out of the way — but still there as a backstop. Then there’s the liberal Democrat wing, personified by Senate Majority Leader Harry Reid (D-Nev.), who announced in a radio interview that he fears Obama’s proposal will crimp home ownership. Unfortunately, these stances are too often vague stakeouts of ideological positions about the role of government — and too rarely about the very basic math of housing finance.
Right now, there is about $10 trillion of mortgage-related debt outstanding. Fannie and Freddie securities make up roughly $4.4 trillion — slightly less than half — of that. The largest holder, in turn, of these Fannie and Freddie securities are U.S. commercial banks, which in the first quarter of 2013 held roughly $1.6 trillion of them. Another huge chunk — more than $1 trillion — is held by the Federal Reserve. About the same amount is held by “the rest of the world” — often foreign central banks and sovereign wealth funds — and another chunk about that size is held by mutual funds.