Beginning last year, Senate Banking Committee Chairman Tim Johnson (D-South Dakota) and I held a series of in-depth hearings on how to reform our broken housing market. The hearings examined the massive taxpayer intervention for Fannie Mae and Freddie Mac that occurred in 2008, and the negative consequences that have arisen as a result of the federal government controlling almost the entire mortgage finance market since then. Building on those hearings and bipartisan legislation introduced by senators Bob Corker (R-Tennessee) and Mark Warner (D-Virginia), Chairman Johnson and I recently circulated legislation to wind down Fannie and Freddie, end the government domination of the housing market and promote the re-entry of private capital into our housing finance system.
Fannie and Freddie greatly contributed to the housing bubble, the 2008 financial crisis and the resulting dramatic government intervention. In the lead up to the crisis, they were dangerously undercapitalized, holding just 45 cents in capital for every 100 dollars in mortgages they guaranteed. The government assumed control of these two multi-trillion dollar companies because they did not have enough capital to support expected losses. These forces culminated in a perfect storm, costing taxpayers more than $180 billion in bailouts, crushing our economy and undermining America’s international standing.
Since the crisis, the government has guaranteed 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. As a result, the U.S. taxpayer remains in the first-loss position, completely exposed to nearly 100 percent of future losses at Fannie and Freddie. If we do nothing, taxpayers will continue to be subjected to potential future economic crises related to the nearly $5 trillion in mortgages owned or guaranteed by the two entities. Inaction means more taxpayer money to fund future bailouts, continued government intervention in the housing market and the continuation of “too-big-to-fail.”
Our bipartisan proposal re-establishes the private sector as the engine of housing finance. Decisions regarding mortgage credit are moved to the private sector, rather than the government dictating how and to 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. We move 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.
Americans deserve a robust, sustainable housing finance system that will provide future economic opportunities for millions of families and individuals. There is strong, bipartisan support before the Senate Banking Committee to end the government conservatorship, wind down these too-big-to-fail companies and transition to a new system that relies on private capital to fund housing and makes taxpayer exposure to housing market risk extremely remote. It is time to move this legislation forward, reduce the government’s footprint and bring private capital back into the housing market.
U.S. Senator Mike Crapo is the Ranking Member of the Senate Banking, Housing and Urban Affairs Committee.