A Bipartisan Opportunity to Reform Housing Financing, Protect Taxpayers

Sen. Mike Johanns

 

As the pains of the housing collapse that spawned an economic crisis five years ago still linger, taxpayers today find themselves no more protected from a forced bailout than they were in 2008, when they had to pick up the pieces from the failures of two Government Sponsored Enterprises (GSE), Fannie Mae and Freddie Mac. The $188 billion taxpayer bailout that ensued is unacceptable and should never be repeated, which is why Washington must seize a bipartisan opportunity to bring about meaningful reforms to the housing finance system.    

The crisis emerged when Fannie Mae and Freddie Mac defaulted on their unsustainable loans. The system in place did not allow them to hold sufficient capital to protect against their losses, despite obligations to pay private investors who purchased bundled mortgages, backed by a government guarantee. 
When the bubble burst, trillions of dollars in homeowner equity were wiped away, and subsequently personal savings, as home values dropped an unprecedented 30 percent. It also put taxpayers on the hook for bailing out the GSEs – money that has yet to be fully repaid. This spawned the worst recession since the Great Depression.
While the economy has seen some improvement and home prices have since trickled back up, the failed model of the past is still in place. That means taxpayers are still on the hook for another bailout if the economy again falters. The good news is that there is strong bipartisan momentum building toward finally reforming our broken housing finance system. 
As a member of the Senate Banking, Housing and Urban Affairs Committee, which has jurisdiction over housing finance reform, my colleagues and I have spearheaded a bipartisan effort to transition to a more sustainable housing system. This summer, eight of us introduced legislation that would help ensure taxpayers are never again left holding the bag to bail out enterprises like Fannie Mae and Freddie Mac. Our bill replaces this government duopoly with a privately capitalized system that preserves market liquidity. More members have signed on in recent weeks and subsequent committee hearings have reinforced our efforts.
During hearings, I routinely emphasized the importance of ensuring any housing reform plan doesn’t harm community banks and Main Street lenders. This is crucial in rural states like ours. Giving Nebraskans greater opportunity to borrow from local lenders is an important piece that our legislation properly addresses. 
Momentum toward reform is also happening in the House of Representatives. If both chambers can continue to move forward on the issue, I am confident we can hammer out any remaining differences. Additionally, President Obama has joined the discussion since we introduced our legislation by encouraging us to move forward with our bipartisan plan.
The sting of the financial crisis has not completely worn off, as many families continue to work to rebuild their equity and replenish savings. Yet until now, no serious opportunity to reform the housing finance system has emerged. The growing momentum from both parties, opposite chambers of Congress and President Obama is a seemingly rare chance in Washington to bring about meaningful reforms to protect taxpayers.