Fan and Fred: A Bad GOP Sequel
Want More Government Guarantees for the Housing Market? Rep. John Campbell Does.

If you want to understand the power of special interests in Washington, all you have to know is that a conservative Republican--Rep. John Campbell of California--has introduced a bill (H.R. 1859) to set up a government-based housing finance program that is even worse than Fannie Mae and Freddie Mac.

The elimination of these two insolvent government-sponsored enterprises (GSEs), which operate a secondary market in mortgages and mortgage-backed securities, is one of the top items on the Republican and conservative congressional agenda. And Mr. Campbell's bill cites the elimination of the GSEs as one of its purposes. But no one thought this meant replacing them with others that could potentially be even more costly than the $150 billion Fannie and Freddie that have already soaked up from taxpayers.

The tipoff about H.R. 1859 is in the brief summary that appears under the bill's number on the first page: "To ensure the availability," it says, "of reasonably priced conventional mortgages to borrowers in all economic cycles." As a rule of thumb, any time you see the phrase "reasonably priced" in a piece of legislation, you can be confident it is proposing to subsidize something--giving to one group by taking from another. That's what this bill is all about, and a trip through its many pages tells us that some people have learned nothing from the financial crisis.

To replace Fannie and Freddie, which guarantee mortgage-backed securities, the bill would create "housing finance guarantee associations" that will have the power--you guessed it--to guarantee mortgage-backed securities. Although Fannie and Freddie were only implicitly backed by the federal government, the guarantees of these new associations will be explicitly backed by "the full faith and credit of the United States." If you had been worried about the government's $14.3 trillion in outstanding debts, you will now have more to worry about.

Fannie and Freddie were not required to register their mortgage-backed securities with the Securities and Exchange Commission (SEC). This allowed them to accumulate a vast quantity of subprime and other risky mortgages--the mortgages that eventually drove them to insolvency--without anyone realizing what they were doing. The Campbell bill also exempts the housing finance guarantee associations from SEC registration. The bill does require the associations to disclose details about the quality of the mortgages they are underwriting--but who cares, if they are guaranteed by the full faith and credit of the United States?

For 15 years before their failure, Fannie and Freddie were regulated by a government agency. This was necessary because of the worry that the government might be responsible for their losses. So the idea was to assure that they didn't fail. But of course they failed.

Sure enough, the housing finance guarantee associations created by Mr. Campbell's bill will be regulated by a government agency to assure their safety and soundness. Anyone feel comforted by that?

The bill's defenders will undoubtedly claim that the regulator of these new associations, the Federal Housing Finance Agency, will have the authority to impose a fee for the government's guarantee. This is a familiar ploy. The argument is that the government will be compensated for the risks it is taking.

The argument might have been credible if the Federal Deposit Insurance Corporation had been fully compensated for the insurance it extended to failed banks, or if the Pension Benefit Guaranty Corporation were not currently under water for the risks it has not been paid for, or if the National Flood Insurance Program were actuarially sound. The reality is that Congress always sees to it that its favored groups don't have to pay for the risks they create. Instead, we wait for the collapse of these programs, when the taxpayers are required to pick up the tab.

A legitimate question is qui bono--who benefits from the Campbell bill? We can start with the homebuilders. Low government-subsidized mortgage rates allow them to build bigger and more expensive houses. Then there are the realtors, who will be able to sell more of those bigger houses. There are also the large banks--H.R. 1859 explicitly allows them to get in on the action by organizing and owning the guarantee associations.

Today Republicans and tea party members are struggling to limit government involvement in the economy, government debt is spiraling out of control, and Fannie and Freddie are still gaping holes into which the U.S. Treasury is shoveling money. It is truly shocking that anyone would propose legislation to expand the government's role in the housing market instead of winding it down. Or add to the government's obligations instead of paying them off. Or create new Fannies and Freddies even before the stupendous losses of the originals have been totaled up.

But, hey, that's business as usual in your nation's capital.


Peter Wallison is in Arthur F. Burns Fellow in Financial Policy Studies at AEI

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