It has been a long time coming, but the United States might finally have a mortgage reform blueprint. A bill introduced on Thursday would wind down Fannie Mae and Freddie Mac over five years and use a different vehicle and market-based pricing for Washington's home loan guarantees.
The challenge is finding a plan both Democrats and Republicans can stomach. The first attempt, from the House GOP, was a nonstarter with Democrats. It largely privatised mortgage risk and, although that has proven workable elsewhere in the world, critics feared it would threaten home affordability in America.
The Senate managed to conjure measures that achieved bipartisan support within its ranks. They relied on government guarantees after the private sector absorbed a first loss. But that failed to excite House Republicans, who worried it would cost taxpayers money since it depended on watchdogs with a poor track record to evaluate and price the risk.
The new Partnership to Strengthen Homeownership Act, introduced by House Democrats, fills a vacant plot between those two proposals. Uncle Sam would still backstop most mortgage risk, but investors would take the first five per cent of losses. Crucially for any Republican supporters, the private sector would also share a fraction of the remaining risk, allowing the market to price the exposure.
The bill might be too kind to Fannie and Freddie. Depending on the outcome of an ongoing court case, it could hand wiped-out investors some residual value after the government is repaid for its mammoth 2008 bailout. The deployment of the existing affordable-housing agency, Ginnie Mae, to replace Fannie and Freddie could raise questions of its own. Whether five per cent is the right first loss is also likely to spark debate, as will other details.
The fine print can, however, surely be hashed out. It always looked like the United States was going to keep the government involved in mortgage finance. At least there's now a plan that treads a line between the opposing views in Congress on to the extent of that involvement. Election seasons being what they are, it still probably won't go anywhere until at least next year. But it could be the kind of middle ground both parties eventually accept.
