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U.S. National Debt:

Housing Finance Reform Within Reach

Guest column submitted by U.S. Senator Mike Crapo Ranking Member of the Senate Banking, Housing and Urban Affairs Committee

In 2008, then-Federal Housing Finance Agency (FHFA) Director James Lockhart stood jointly with then-Treasury Secretary Hank Paulson to announce Fannie Mae and Freddie Mac were being placed into conservatorship, since they did not have enough capital to support expected losses.  The government assumed control of these two multi-trillion dollar companies, with combined portfolios exceeding five trillion dollars.  Meant to be a temporary solution until Congress and the Administration could reform and strengthen the housing finance system, Paulson called the conservatorship a "time out."  No one envisioned it lasting five years.     

Chartered by Congress to help underwrite home mortgages, Fannie and Freddie greatly contributed to the housing bubble and financial crisis.  Their primary function is to package loans made by lenders into mortgage backed securities, which can be sold to investors along with a guarantee that principal and interest on the underlying mortgages will be paid in full.  However, during the height of the housing bubble, Fannie and Freddie began acting like highly-leveraged hedge funds, purchasing as investments nearly 40 percent of private label subprime securities.  Underwriting standards deteriorated significantly, and many of the loans issued were far from safe and secure.  These moves contributed to the companies' massive losses, and over the last five years, we have since seen the bill to American taxpayers rise to nearly $200 billion. 

Since the crisis, Fannie and Freddie have controlled no less than 95 percent of the housing finance market in any given year, leaving no room for the private market to re-enter and compete with the federal government.  Although it is positive that these entities are now reporting profits under conservatorship, we must not lose focus on the need to reduce the government's oversized footprint in housing finance and bring private capital back into the market.

Encouragingly, there is more traction toward moving forward with housing finance reform than there has been at any point during the five-year conservatorships of Fannie and Freddie.  For the first time since the financial crisis, the White House, U.S. Senate and U.S. House of Representatives are all moving forward or advocating for reform.  We must use this momentum as an opportunity to build consensus around ending the conservatorships, while building a stable secondary market that brings back private capital and avoids repeating the mistakes of the past.  We must find the right balance between providing broad access to mortgages while protecting taxpayers from losses.     

The Senate Banking Committee has a long history of working together in a bipartisan manner.  At a time when Congress appears significantly divided on almost every issue, we are working to enact bipartisan, common-sense reforms to revamp our housing finance system-a task that everyone agrees is extremely complex.  We have already proven our ability to collaborate by moving legislation to prevent Fannie and Freddie from being used as piggy banks and passing the FHA Solvency Act of 2013 out of Committee.  Now, our members are working together on important proposals that are helping to shape the debate around housing finance reform moving forward.

Nearly every American has a stake in our actions.  They may be a young family starting out and hoping to buy their first home; a college student seeking affordable rental housing; a retired couple looking to sell their home and move closer to their grandkids; or taxpayers worried about the consequences of inaction.  The choices and trade-offs that we make will not only determine the sustainability of a robust housing market, but also the future economic opportunities for millions of families and individuals.  It is time to make the hard decisions and finally end the five-year "time out." 

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