The Obama administration released its report on what to do about the government’s role in the housing market this morning. Politically, the proposal looks like a punt to House Republicans — it noncommittally gives three options for ending/replacing Fannie and Freddie with the feds playing a very different role in each one. Substantively, our colleague Steve Gandel writes, the administration is most fond of one particular solution, albeit with a potential glitch:
Under option 3, Obama is proposing to replace Fannie and Freddie with private companies that would provide mortgage insurance. Those companies would then be forced to buy reinsurance from the government for all of the mortgages they guarantee. But the government’s reinsurance would not pay out if a particular mortgage goes bust. The reinsurance the government provides would only kick in if the private companies are wiped out.
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Even Alex Pollock of the American Enterprise Institute, which has usually been fiercely critical of Obama’s plans, said the reinsurance scheme was far superior to what we had under Fannie and Freddie, though Pollock said he would have still preferred to see a complete government pull back from the housing market. The rub is the reinsurance. Here’s where we get to the feasibility. The reason why the plan would have fewer losses for the government than what we had under Fannie and Freddie is that Uncle Sam would have this pool of money that it built up by charging for the reinsurance. Price that right, and there would be money to pay for clean up when things go wrong. Price it wrong and taxpayers are on the hook. Pollock says the government’s history of being able to price insurance is very bad. The problem is there is will be incentive to price it to low, so you can help people get more affordable housing.
So how good is this plan? It is at least a better option then what we have now. If the FDIC is the model as it appears to be, then FDIC did a much better job of managing the banking crisis than Fannie and Freddie did. The FDIC is essentially broke, but it hasn’t required anything close to the $151 billion bailout that Fannie and Freddie have gotten from the government. But the idea that government can have a role in housing and not have it cost taxpayers something in bad times is silly.