Mortgage Reform and the New Normal

Daniel Indiviglio of Reuters finds the new bipartisan Senate bill to reform the U.S. mortgage finance system disappointing. The 2010 debate over financial reform failed to tackle Fannie Mae and Freddie Mac, despite the fact that the GSEs had only been kept afloat by a $190 billion bailout. And in the years since, the housing market recovery and the decline in mortgage defaults have greatly reduced the pressure to overhaul Fannie and Freddie, both of which have become a major profit center for the federal government. Rather than radically overhaul the U.S. mortgage finance system by reducing the extent of government involvement in the mortgage market, Sens. Mark Warner and Bob Corker have proposed replacing Fannie and Freddie with a new federal agency that would essentially provide mortgage lenders with insurance against catastrophic losses. As Indiviglio explains, this approach “leaves open the danger that lobbyists manage to ensure that the first loss is too small to discourage risky lending or the fee too low to cover the government’s risk.” But given that the political prospects for a radical overhaul have grown very dim, Warner and Corker’s incremental approach does have the advantage of offering U.S. taxpayers some limited protection:

Investors would have to take the first 10 percent loss on mortgage securities in market that’s currently $5 trillion in size, while the next 2.5 percent would be funded by guarantee fees. Overall that’s a cushion around two-and-a-half times as large as Fannie and Freddie’s losses from 2007 to 2011.

It’s a shame Congress couldn’t act sooner and more aggressively to slash government involvement and subsidies in the mortgage market. Now that Fannie and Freddie are again posting big profits, reformers have to be practical. If there’s much more delay, even this modest reform proposal may fall by the wayside.

One gets the impression that the case of the GSEs is illustrative of a broader phenomenon: the post-crisis environment created an opportunity for sweeping reform across many domains, and the Obama administration took advantage of it by passing the fiscal stimulus law and sweeping overhauls of the health system, student loans, food safety laws, and financial regulation. This ambitious legislative agenda sparked a strong reaction, primarily but not exclusively on the political right, and now it seems that the appetite for sweeping reform has mostly evaporated, despite the fact that Congress hasn’t tackled — hasn’t come close to tackling — a wide range of serious structural problems, in the mortgage market, as Indiviglio makes clear, but also in areas that we’ve notionally addressed, like the broader financial system, the health system, and the higher education sector, among much else. By 2017, we will have a new president. Somehow she or he will have to foster a renewed sense of urgency, lest we remain mired in the “New Normal.”

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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