Former Treasury Secretary Henry Paulson weighed in today on reform of the housing finance system with an op-ed piece in the Washington Post that's been headlined in Twitter streams all morning as calling for dismantling Fannie Mae and Freddie Mac, the discredited housing finance giants now in conservatorship after needing $145 billion in federal capital to stay afloat. And coming from W's former Treasury Secretary, there's nothing surprising about that.
What is surprising is that after Paulson gets past the ritual call for the companies' demise, he does a virtual 180 degree turn and suggests that the answer to "what next, then" is...well, Fannie and Freddie run as utilities with a regulated rate of return. And he then goes on to spend a considerable amount of remaining space to explaining how central the companies are to the continued good health of the housing economy, and that they were the "...most effective of the stimulus efforts undertaken in the past two years."
Now Fannie and Freddie have about as many friends in Washington today as a band of fleas in a dog grooming salon. So to have Paulson extolling their virtues is news indeed. Of course, many have ignored this and instead touted this as a "kill the GSEs" piece. I think this just proves that when you're a hammer, everything is a nail. If your disposition is to blame Fannie and Freddie for everything that's gone wrong in the housing system, you will focus on this. Case in point is Joe Wiesenthal at BusinessInsider.com who calls the play right and blasts Paulson for failing to deliver the coup de grace that he thinks they deserve.
Paulson's fundamental point is totally accurate, though. As the Washington noise machine spins up around Fannie and Freddie now that the Dodd-Frank financial reform bill is behind them, policy makers should take careful note. The housing economy remains in the dumps. House prices are stubbornly refusing to rise. Foreclosures continue at a torrid pace. The Administration's loan modification program, Making Home Affordable, is generally regarded as a failure. The combination of foreclosed, for sale homes already in lenders' inventories and the so-called "shadow inventory" of homes whose borrowers have stopped paying but who have not yet been foreclosed is a heavy, heavy weight on the market. Other capital is unlikely to come back into the market until Dodd-Frank's terms are more clearly understood and investors sense a genuine bottom to the housing market.
In the meantime, Fannie, Freddie and FHA are the housing market, as Paulson rightly points out. Investors are buying their securities. Mortgage interest rates are lower than they have been in decades. Credit and down payment standards are tougher than they were, but the companies in 2009 pumped $1 trillion in mortgage finance into the economy, providing more than 5 million households funds to buy or refinance a home. And rental housing, so critical to lower and moderate income families, also is relying more heavily than ever on Fannie and Freddie, whose share of large rental housing loans has grew by more than 30 percent last year over 2006.
Paulson's call for continued federal support for housing finance, with explicit subsidies that are paid for by those who enjoy its benefits, is a theme that runs through many of the papers submitted in response to HUD's and Treasury's call for public input on the topic. And it certainly will not be controversial when the two Cabinet departments convene their August 17 conference on this topic in Washington.
Paulson's piece is a welcome antidote to the hysterical attempts by Republican legislators and conservative apologists for Wall Street scoundrels to blame Fannie and Freddie for the mortgage mess. Congress and the Administration could do worse than embrace his emphatic and, in my view, accurate pitch that in spite of their well-publicized failures at the height of the boom, the government chartered companies have still succeeded in doing what they were originally set up to do: provide stability in the mortgage markets, and guarantee liquidity and access for responsible, affordable and sustainable loans for rental and ownership housing. Designing the mortgage finance system of the future should build on those virtues, address the obvious failings, and insure that American consumers can continue to find affordable, long term mortgage loans.