The white paper released by the Treasury Department today briefly outlines three options for the future of the mortgage market. One option would remove any government backstop and pare back the Federal Housing Administration so that it only aids in mortgages for some low-income borrowers.
Another would create a limited federal backstop that would kick in only during a severe economic downturn. The third option proposes that the government act as a reinsurer, providing insurance on mortgages only after a group of highly regulated private insurers had been wiped out.
I get the feeling that the third option is the one with the most support from inside the Obama administration. Even though it is presented last, most of the news accounts I’ve read of the “white paper” begin by discussing the third option—perhaps indicating that the Obama administration is coaching reporters to lead with that.
The problem is that this third option looks a lot like the system we had before the crisis. Although the plan calls for a group of “private mortgage guarantor companies that meet stringent capital and oversight requirements,” that is an unrealistic expectation. In practice, the private mortgage guarantor companies will lobby for lower capital requirements and against oversight.
They’ll ally themselves with advocates of affordable housing, mortgage originators and Wall Street—all of whom would benefit from loosening the regulatory apparatus around the guarantors. The costs of this loosening would not be apparent until it was too late, and they would be borne by taxpayers.
In other words, the very same political dynamics that allowed Fannie and Freddie to become uncontrolled behemoths would free the mortgage guarantors from oversight.
What’s troubling is that the Obama administration must know that this will happen. The white paper describes how Fannie and Freddie ‘s “aggressive lobbying efforts had successfully defeated efforts to bring them under closer supervision.” It’s impossible to believe that the Obama administration cannot see that this will happen all over again.
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