Too Big Not to Fail

By JOHN CARNEY
NYT

THE Obama administration is set to discuss the future of Fannie Mae and Freddie Mac, the mortgage giants that largely escaped reform in the financial overhaul of the Dodd-Frank law, at the Treasury Department on Tuesday.

It’s about time: the government’s role in housing finance has ballooned since the start of the mortgage crisis. Despite their central roles in the housing bubble, the Federal Housing Administration, Fannie Mae and Freddie Mac now back more than 95 percent of new mortgages. In 2006, at the height of the housing boom, the F.H.A.’s share of the mortgage market was 2 percent; today it’s around 30 percent. Given that the agency’s requirements on down payments and creditworthiness have been less stringent than Fannie Mae’s, that should concern all taxpayers.

Just about everyone agrees that the government’s extraordinary role in supporting the housing finance market should be curtailed. Most government officials, however, insist that the time for serious reform will be when “the housing market is clearly recovering,” as the former Treasury Secretary Henry M. Paulson Jr. recently put it.

But by waiting for a recovery before reforming the government’s mortgage-backing trio, we are getting things backward. Far from being the last bulwark supporting the housing market, the F.H.A., Fannie and Freddie are very likely holding back the private loan industry. And, unfortunately, a little-noticed provision of the Dodd-Frank act threatens to undermine efforts at rebuilding an innovative and healthy private sector for mortgages.

(More here.)