Scott Garrett gave an interview to National Journal Daily which yesterday he had posted on his Congressional website. The subject of the article was Congressman Garrett’s desire to place reforming GSE’s at the top of the House Republican’s agenda. For those of you unfamiliar with the term, GSE stands for Government Sponsored Enterprise. In this case he’s referring to the need to reform Freddie Mac and Fannie Mae, the two entities with the dual responsibility of providing liquidity to the secondary housing market and also provide assistance for lower-income Americans to realize the dream of home ownership.
As you’re probably aware, two years ago, the Federal government assumed control of the ailing Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). Fannie Mae and Freddie Mac were profitable in most years until the “Great Recession.” As housing prices dropped nationwide and foreclosures increased, the two GSE’s suffered large losses on various investments in their portfolios and the government had to step in to provide confidence to the market. Ultimately, we the tax payers are bailing out these two financial giants.
So reform is needed and welcomed. Scott Garrett says he wants to make sure we taxpayers aren’t subject to any potential future bailouts and I completely endorse the concept. However, Mr. Garrett does not want to reform the system he wants to completely privatize it. I know this because Mr. Garrett is a cosponsor of Jeb Hensarling’s legislation which if enacted would do just that.
The Congressional Budget Office (CBO) analyzed three broad alternatives for structuring the secondary mortgage market:
- Adopting a hybrid public/private approach that would involve explicit federal guarantees of some privately issued mortgage-backed securities;
- Establishing a fully federal agency that would purchase and guarantee qualifying mortgages; or
- Promoting a fully private secondary market with no federal guarantees.
… the liquidity of the private secondary market might dry up during periods of acute financial stress. Moreover, privatization might not significantly reduce taxpayers’ overall exposure to risk if it shifted credit risk on mortgages to banks that were covered by federal deposit insurance and if that additional risk was not recognized in regulators’ actions and in the fees charged for deposit insurance.
Nevertheless, all developed countries with high rates of home ownership depend on some degree of government support to maintain the flow of credit to the mortgage market during periods of financial stress.
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