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The One Mortgage Fix Washington Isn’t Talking About

Obamacare’s early problems could recast the debate about mortgage market reform.

What does health care have to do with housing prices? A lot, actually.

The stumbles with the Healthcare.gov website and the individual policy cancellations may or may not get resolved soon. But they have served a purpose. They have highlighted the extent to which health care reform is a “kludge,” as Paul Krugman recently wrote, a jury-rigged and complicated structure that extends social insurance largely through private sector means, leavened by a passel of government regulations and subsidies.

Obamacare was a concession to the status quo. Many progressives would have preferred a government-run, single-payer plan — Medicare for all — but that was politically impossible. Such a change would have been hugely disruptive, since tens of millions of people would have had to be moved off their policies, and many thousands in the insurance industry would have lost their jobs.

So let’s turn to mortgage market reform. Congress is debating what to do about Fannie Mae and Freddie Mac, the government-owned mortgage insurance companies that collapsed during the 2008 financial crisis.

Worried that the government backs too many new mortgages, the Washington consensus has coalesced around a solution that looks a lot like Obamacare. The leading proposals involve getting rid of the Frannies to have private companies create mortgage-backed securities. The government’s role would be to insure some of those mortgage-backed securities, to subsidize the home purchases of the disadvantaged and to regulate mortgage-market players to prevent predatory practices and risk-taking that could lead to taxpayer bailouts. Sens. Bob Corker, Republican of Tennessee, and Mark Warner, Democrat of Virginia, have a bill that embodies this harmony.

So what about alternative ideas? There are surprisingly few.

Some conservatives argue for the government to get out of the mortgage market completely. But what passes for the left’s position in Washington is not the opposite of the right’s. The liberal establishment concedes the argument that reform should bring investors back into the housing market and shrink government’s role. They spend their energies pushing to expand and protect housing affordability and access.

The Center for American Progress, a group that has a pipeline to the Democratic mainstream, has played a big role in formulating the current kludge concordance. Even the Center for Responsible Lending, a progressive group dedicated to fighting predatory loans, agrees “with the emerging consensus,” according to a vice president of the group in Senate testimony last month, “that taxpayer risk must be insulated by more private capital.” (The Sandler Foundation, the founding donor of ProPublica, has long been a leading supporter of both organizations.)

What’s almost entirely missing is any unashamedly liberal argument that the government should continue to play a large role in the mortgage market. In fact, it’s taken as a given that too much government involvement is a worrisome thing.

The opposite may well be true: There’s a good argument that preserving the government’s large and active role will make the market safer and more efficient than the reforms.

The consensus has it right that housing is a public good. Homeownership builds wealth, even for low-income households, according to Carolina K. Reid, a professor of city and regional planning at University of California, Berkeley. Of course it’s no guarantee. When the poor buy homes, they don’t stay in them as long as those in the middle and upper classes, meaning that homeownership is more likely to be a losing proposition for the poor than for the better off. Even when the poor do manage to build wealth, they tend to have lower returns than the wealthier. But renters build almost no wealth at all, Professor Reid says.

A large government role in housing is also, let’s face it, unavoidable. As even centrist Republicans agree, the government is and always will be on the hook if the housing market crashes. So many Americans own homes that the government will intervene during a crash. By including the government guarantee in the Frannies’ reform plans, overhaul proponents are conceding that government involvement is necessary to lower the costs of mortgage financing. Given that, it’s probably cheaper for the government to do it as directly as possible. That would be simpler than insuring private mortgage-backed securities, cutting out a whole swath of middle men and overhead.

And it’s more honest. Yes, keeping the Frannies in the government would put their liabilities on the federal balance sheet. Lyndon B. Johnson moved Fannie Mae out of the government to play this very game. But because the government obligation is inevitable, it ought to be transparent and explicit rather than obscure. Keeping Fannie and Freddie as government operations is the cleanest way to do this.

Is it realistic? Keeping the government directly involved in the mortgage market has a big advantage over single-payer health care: It is the status quo. Taxpayers now own Fannie and Freddie and the federal government controls them. It might well be more disruptive to raze them and create a private mortgage market.

This is not a wild proposal; we’ve already tried it. From its creation in 1938 to 1968, Fannie Mae was part of the government. It bought loans from banks and held them on its balance sheet. Homeownership expanded by about 20 percentage points and we had no national housing crashes that wiped out homeowners and the country’s banking system.

Fannie and Freddie’s problems developed much later, after they became publicly traded companies. These “neither fish nor fowl” hybrids had both government charters with implicit government guarantees and had shareholders to please. In their drive for shareholder value, the companies took more risk. And then they lobbied to lower their capital requirements to take even more risk. (They were not the cause of the financial crisis, as some continue to argue.)

The danger of the untested reform proposals is that they may create new versions of this distortion — and bring about more reckless risk-taking. In addition, the proposals benefit the banks more clearly than they do homeowners.

Keeping the Frannies as part of the government could resolve this issue. Government operations have flaws, but a voracious appetite for risk is generally not one of them. The mortgage market might become safer.

And, possibly, smaller, with less trading of mortgage-backed securities than we had before the financial crisis. But what matters is the homeownership rate and housing market stability, not how many investors can bet on securities.

A final objection is that any government entity is vulnerable to shutdowns, to horse-trading, to political popularity. Right now, Congress is treating the immensely profitable Fannie and Freddie as a piggy bank. It’s a valid criticism, but one could insulate the Frannies by making them a government corporation, like the Federal Deposit Insurance Corporation.

The kludge consensus may happen to be the best solution. But it’s hard to tell because we don’t hear other visions. Housing was central to the financial crisis. If any topic should generate a full spectrum of radical and imaginative ideas, this is it.

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