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Housing Finance Reform: Protecting American Taxpayers

Guest column submitted by U.S. Senator Mike Crapo

Advancing housing finance reform provides an opportunity to institute sound reforms that will better protect the American taxpayer.

As we all remember, the 2008 financial crisis began with the bursting of the U.S. housing bubble.  A central reason for this bubble and the subsequent burst was the role of Fannie Mae and Freddie Mac.  During the height of the housing bubble, Fannie and Freddie began operating as undercapitalized insurance companies, holding just 45 cents in capital for every $100 in mortgages they guaranteed.  When housing prices collapsed in 2008, it quickly became apparent that the thinly-capitalized enterprises would not be able to withstand their massive losses.  Fannie and Freddie were placed into conservatorship, a status which then-Housing and Urban Development Secretary Hank Paulson described as a "time out," and cost taxpayers nearly $200 billion. 

After nearly six years of Fannie and Freddie in conservatorship, the government continues to dominate the mortgage market.  The government-sponsored enterprises (GSE) and Federal Housing Administration currently guarantee nearly 100 percent of all mortgage backed securities, and American taxpayers remain on the hook for downturns in the housing market.  The status quo is unacceptable.

At the onset of the 113 thCongress, Senate Banking Committee Chairman Tim Johnson and I made it our priority to address our housing situation.  Over the course of two years, we held a series of in-depth hearings that examined ways to reform our broken housing market.  We wanted to enact smart, thoughtful reforms that will attract private capital back into the market, ensure that taxpayers are protected going forward and provide market participants with certainty regarding what the future system would look like.  

This ambitious undertaking resulted in a proposal that re-establishes the private sector as the engine of housing finance.  Decisions regarding mortgage credit are pushed back to the private sector, rather than the government dictating how and where credit flows.  It establishes strong underwriting standards to assure solid mortgages.  It places significant private capital ahead of the taxpayer in case the housing market experiences another downturn.  It moves away from the status quo, where Fannie and Freddie backed toxic mortgages and held basically no capital, to a system that protects taxpayers with a strongly capitalized private sector housing market.

In May, the Banking Committee approved our housing finance reform legislation with a well-balanced, bipartisan majority.  For the first time in the nearly six-year conservatorship of Fannie Mae and Freddie Mac, both the House Financial Services Committee and the Senate Banking Committee have passed legislation to reform this system.  That, in and of itself, was an important milestone.

Recently, the non-partisan Congressional Budget Office (CBO) released a score for the legislation, estimating a cost savings to the government of nearly $60 billion over a ten-year period.  The CBO estimated that the government would take on less risk under the Crapo-Johnson legislation than it would from continued operation of the GSEs under current law and thereby incur smaller costs.  The significant savings estimated by the CBO reaffirm that our legislation is designed to have a positive economic impact and protect the American taxpayer.

Throughout the Congress, the Banking Committee has been able to work through some very complex issues in a bipartisan manner.  While the path forward on housing finance reform is not clear, it does not diminish the need for reform.  Each day we delay, we increase the risk that taxpayers will be called upon to bail out the two mortgage giants again.  Washington must work together to advance common-sense legislation that will protect taxpayers, reduce our debt and have a positive impact on economic growth.

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