Teaser: Neighborhood (copy)

This editorial appeared in the Washington Post.

Temporary measures have a way of becoming permanent in Washington. Case in point: Friday was the 11th anniversary of what was supposed to be a temporary federal takeover of the troubled mortgage-guarantee entities Federal National Mortgage Association and Federal Home Loan Mortgage Corporation. To mark the occasion, the Trump administration released its proposal for reforming Fannie Mae and Freddie Mac, which back 44% of single-family mortgage debt, worth $4.7 trillion. Described in many articles as a plan to “privatize” Fannie and Freddie, the 53-page document could more accurately be described as a blueprint for restoring a modified version of the pre-2008 public-backing-private-ownership hybrid situation, and for doing it by administrative fiat, because neither President Donald Trump nor Congress wants to risk comprehensive reform legislation before the 2020 election.

The good news is that the administration appears to have eschewed pleas from some in the financial sector to “recap and release” the entities unchanged, which would have conferred a windfall on hedge funds that bought up their beaten-down stock after the federal takeover. Instead, federal regulators would gradually withdraw federal ownership in favor of private capital — while forcing Fannie and Freddie to pay for an explicit federal guarantee against catastrophic losses only.

This suggestion, which resembles bipartisan proposals previously considered but not approved in Congress, would indeed be an improvement over both the government-run status quo and the entities’ past, in which they were to take increasing risks in pursuit of maximum profits, while enjoying assumed, and unlimited, taxpayer backing. But the exact timetable, dollar amounts and other crucial details were left unspecified.

Probably the most controversial idea in the plan was its opposition to a regulatory loophole, known obscurely as the QM patch, which has allowed Fannie and Freddie to back an increasing number of mortgages to households that owe more than 43% of their income. This lenient approach may be counterproductive, because at the margins, looser lending increases demand for houses — which keeps home prices higher.

Given that the federal consumer finance regulators never intended the QM patch to last beyond 2021, it’s probably better to keep Fannie and Freddie’s mission more narrowly targeted.

A slimmed-down but still government-backed Fannie and Freddie has predictably earned faint praise from advocates of more radical free-market options and condemnation from those who favor aggressive government support for affordable housing. But all sides have had a decade’s worth of chances to take Fannie and Freddie permanently out of limbo through legislation. Interest group bickering over the details doomed compromise. So the crucial U.S. housing market must bear the burden of what seems increasingly like permanent executive-branch influence, and the uncertainty that comes with it.

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