Senate Plan to Reform Mortgage Giants Fannie Mae and Freddie Mac Would Make Things Worse for Taxpayers, Consumers

Senate Banking Committee chairman Mike Crapo released a proposal today to reform mortgage giants Fannie Mae and Freddie Mac, but the plan creates a big new liability, warns CEI senior fellow John Berlau.

“GSE reform is desperately needed, but the proposal released today by Senate Banking Committee Chairman Mike Crapo would make matters much worse for taxpayers and consumers.

“Crapo’s outline for housing finance policy changes calls for explicit government guarantees of mortgage-backed securities, which would presumably replace the implied guarantees Fannie Mae and Freddie Mac currently enjoy. The problem is that imposing an explicit liability on the taxpayers could mean more risk for the housing finance system, as it could spur a rush to make mortgages that come with explicit government backing.

“The Crapo plan would create even more housing ‘trust funds’ to be funded by the proceeds of the GSEs, with the potential to harm consumers and taxpayers because such funds would lack the oversight that comes with congressional appropriations and could be subject to politicization and misuse.

“The only solution for a robust and stable housing market is to phase out government’s role by reducing both explicit and implicit guarantees and by cutting the red tape strangling prudent borrowers, lenders, and investors. We look forward to working with members of Congress and policy makers on plans that actually achieve real housing finance reform.”

View Berlau’s report: Fannie Mae and Freddie Mac Still Endanger U.S. Economy