After Fannie and Freddie: PATH and Corker-Warner
By: Steven Russell
Last Tuesday, President Obama unveiled his new housing plan to a cheering crowd in Phoenix, Arizona—one of the cities hit hardest by the housing crisis. To the surprise of free-market enthusiasts, President Obama called for the gradual shuttering of Fannie Mae and Freddie Mac, even declaring, “I believe our housing market should operate where there’s a limited government role and private lending should be the backbone of the housing market.” Right now there are two bills in Congress, the Corker-Warner bill that President Obama supports and a bill from Rep. Jeb Hensarling championed by House Republicans. Beyond the rhetoric, what are the major differences between the two plans? Here is a breakdown.
The Corker-Warner bill.
The Corker-Warner bill seeks to wind down Fannie Mae and Freddie Mac and replace the government-sponsored enterprises with a new government agency called the Federal Market Insurance Corporation (FMIC). Unlike Fannie Mae and Freddie Mac, which packaged mortgage backed securities and sold them, the FMIC would insure mortgage backed securities sold by private companies in exchange for a fee. The bill would also require private companies to share the risk with FMIC and take the first losses should the mortgage backed security fail.
The Corker-Warner bill has two aims. The first is to prevent taxpayers from having to rescue the housing market in the event of a future collapse, which is why Fannie and Freddie are being dissolved in favor of a system where the private sector bears more of the risk. The second is to have enough government involvement in the housing market that Americans can still take out 30-year, fixed-rate loans. President Obama and proponents of the Corker-Warner bill think that 30-year, fixed-rate loans help more Americans buy homes, but they believe the private sector will not offer them without government support.
Critics of the bill have arisen from both sides of the ideological spectrum. Some estimate that the plan would make new buyers pay an extra $75 a month on a 30-year, fixed-mortgage, which could endanger the recovering housing market. Other scholars argue that the FMIC will be pressured by politicians to insure risky loans, which, again, will cause a housing bubble that ends in a taxpayer bailout.
The PATH Act—Rep. Jeb Hensarling
Like the Corker-Warner bill, the PATH Act would also phase-out Fannie Mae and Freddie Mac, but it would not create a new institution like the FMIC. Instead, the PATH Act would allow for a limited version of the Federal Housing Administration while letting the private sector handle the rest of the market.
In doing so, the PATH Act also seeks to prevent taxpayer dollars from being used in another housing-related bailout. Unlike the Corker-Warner bill, however, the PATH Act would let the market decide which financial products are viable. (To learn more, see AFP’s letter of support for the PATH Act.)
Both bills are far from becoming law. The Corker-Warren bill has yet to have a hearing, and the PATH Act challenges the typical view that government has to stay deeply involved in housing. Thankfully, the President has joined the chorus recognizing that Fannie and Freddie need to be phased out. Now the critical question: what comes next?