In a speech Wednesday at a conference on the future of the housing market, Rep. Jeb Hensarling (R-Texas) said he would work across the aisle to reform the housing finance system as long as any reform package included certain key principles – including the winding down of Fannie Mae and Freddie Mac.
Reform is needed, Hensarling said, because housing unsustainability eventually “creates economic catastrophe.” He pointed to the mortgage crisis of 2007-2008 as proof.
“Looking back, it is indisputable that historic mortgage market volatility had real, pronounced, and extremely long-lasting negative effects on our economy that far exceeded any temporary value it might have generated,” he said. “The unsustainable housing finance rollercoaster literally wiped out $16 trillion worth of household wealth in the seven quarters from Q3-2007 through Q1-2009. All the harmed lives and economic carnage arising from public policy in pursuit of a few percentage points of temporary homeownership growth, was simply not worth it.”
Hensarling said that Fannie and Freddie should be wound down and their charters repealed. The current system, he said, is unsustainable in the long run.
“The old Fannie Mae- Freddie Mac hybrid public-private chartered system was the basic ‘let’s privatize all the profits and socialize all the losses’ government scheme,” he said. “Its premise? To have two giant corporations monopolize a market and perform four critical tasks all under one roof in the name of efficiency. The GSEs set the underwriting standards, they aggregated all the loans, they performed the alchemy to turn loans into 9mortgage-backed securities), and they guaranteed that MBS with money they didn’t have but kindly took from taxpayers when the going got tough.
“Now, from time to time, some status quo housing finance apologists will pop up and proclaim that the old system wasn’t really all that flawed, and if we just tried it one more time with feeling, we could iron out the kinks and it would work without a hitch,” Hensarling said. “So let me be abundantly clear here: they are wrong. The current system is rigid and risky, distortive and inefficient, and it devalues individual choice and inhibits long-term prosperity. In other words, the hybrid GSE model is wrong. It is unfair. It is broken. It is irreparable. It cannot be saved, it cannot be salvaged; it must not be resurrected, and needs to be scrapped. Otherwise, I have no strong opinions on the matter.”
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Serious housing finance reform should include shutting down Fannie Mae and Freddie Mac, according to the chairman of the House Financial Services Committee.