Good GSE Reform in Both Houses of Congress

by Douglas Holtz-Eakin

The housing GSEs Fannie Mae and Freddie Mac are long overdue for reform. For years they made extraordinary profits using the taxpayer as backing for cheap debt, they figured prominently in the financial crisis of 2008, and now they are de facto government agencies that the Obama administration keeps stealthily off-budget. Enough is enough.

So I am pleased that my old boss Sen. John McCain today is introducing GSE-reform legislation in the Senate. (For those who like such affairs, press event at 1:00 p.m.!) The weird thing is that the WSJ editorial page devoted a lot of ink today to complaining about the efforts of House Republicans. This is odd, because the McCain legislation is identical to its sister bill in the House, introduced by Jeb Hensarling on March 17.

Both bills would move immediately to implement reform by:

— Eliminating the affordable-housing goals;
— Shrinking their portfolios to $250 billion over five years;
— Lowering the conforming loan limit to its pre-crisis level; and
— Raising the fees charged for their guarantees.

These are all good moves. In addition, the bills would specify that after two years, the Federal Housing Finance Agency (FHFA) would have to decide if the GSEs are financially viable. If so, they could resume market operations under new, tighter rules as a transition to being fully private entities.

That’s a good outcome. And the bottom line is that the House and Senate Republicans are both headed in the right direction.

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