The Obama administration came out on Friday afternoon with its highly anticipated ‘white paper’ proposing solutions to revamping the nation’s broken mortgage system. The plan entitled “Reforming America’s Housing Finance Market” addresses the adverse incentives created by the pre-2008 mortgage institutions. As anticipated on Monday, the Wall Street Journal’s prediction that the Obama administration would advocate gradually eliminating Fannie Mae and Freddie Mac was confirmed in this report. However, now the question becomes: what is going to replace these lending institutions?
Outlined in the papers is a strong indication that private mortgage companies will step in to fulfill the role of Fannie Mae and Freddie Mac. While these approaches have been highly recommended by economists, the papers provide little insight into the question of what assurances taxpayers have that they will not be forced to bail out failing lending institutions in the future. Some powerful groups such as the Mortgage Bankers Association, the Financial Services Roundtable, and the Center for American Progress, have aligned themselves with policy proposals that would replace Fannie Mae and Freddie Mac with facsimiles of these institutions. In doing so, these groups are putting the pressure on to maintain the increased role of government in the lending industry and preserve the financial services industry as is.
Proposals have included creating similar institutions to Fannie Mae and Freddie Mac with the addition of federal regulators and charters to guarantee mortgage-backed entities. The New York Time’s analysis afforded by author Gretchen Morgenson is that while the proposals do call for strong regulatory measures to be implemented, empirically the past economic crisis has shown how prone regulators can be to the enterprises they oversee. Notably, the ‘white paper’ issued by the Obama administration provided no clear path to a revised housing finance system that affords for a “catastrophic insurance program” only when private lending institutions have frozen up. The paper also fails to address what the limits of government intervention are.
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