Stimulating reform

US lawmakers have punted the problem of mortgage financiers Fannie Mae and Freddie Mac, probably until 2013 at least. But reforms could take years to implement and a start is long overdue.

Removing the government presence from the mortgage market all at once would be too disruptive to contemplate. Through its various housing agencies, Uncle Sam currently backs about 95 per cent of new lending. But a plan should be put in place to gradually wean the market off federal guarantees over, say, a decade.

A clear path to reform would eliminate uncertainty about the future of housing finance in general and the discredited Fannie and Freddie in particular. As banks are fond of saying when faced with new regulations, knowing what is coming helps remove uncertainty. It would allow financial firms, investors, realtors and borrowers alike to prepare.

One perhaps unexpected side-effect of setting a date for the end of government guarantees could be a boost for the housing market. Without federal subsidies, mortgage loans would become more expensive in the future. This, paired with prevailing ultra-low interest rates, should encourage even cautious buyers to enter the market, clearing inventory and getting housing activity going.

Several proposals to reset housing finance policy are floating around Congress. All would wind down Fannie and Freddie and reduce the government’s role. One would replace them with a government agency backing up to 50 per cent of mortgages. Another would create private sector firms that buy government reinsurance. Yet another, unveiled Sin early December and sponsored by Senator Johnny Isakson, would largely privatise the mortgage market over 10 years.

The Treasury laid out a roughly similar range of options early in 2011, but never sounded enthusiastic about full privatization of the market. That’s unfortunate, since it merits serious consideration. But lawmakers aren’t known for boldness, especially in an election year. The housing lobby could easily paint a picture of Washington’s reforms threatening the American Dream.

But perhaps the powerful constituencies eager for the government to remain involved in the mortgage market — including most lenders, investors and realtors - need to think again, along with politicians. Finalising reform in 2012 could bring certainty, a swifter housing rebound, and more stability to the US economy.