Even as Mitt Romney basks in praise for his “bold” choice of Rep. Paul Ryan, he’s begun to distance himself from his running mate’s controversial proposals for revamping Medicare and Medicaid. Progressives should also ask Romney what he thinks of another of Ryan’s “bold” ideas: privatizing Fannie Mae and Freddie Mac.
Ever since Washington bailed them out four years ago – costing taxpayers $140 billion – the two mortgage giants have been in federal conservatorship. In Path to Prosperity, his budget blueprint, Ryan calls for their “eventual elimination.”
Where does Romney stand on Fannie and Freddie? It’s hard to tell, because since locking up the GOP nomination, Romney has been extremely reticent on the subject of housing. During the Nevada primary – in a state considered ground zero in the housing crisis – he did not exactly ooze sympathy for people at risk of losing their houses. Instead, he advised that government “not try and stop the foreclosure process. Let it run its course and hit the bottom.” In Florida, another hard-hit state, Romney focused not on solutions but on assailing Newt Gingrich for being a highly paid consultant to Freddie Mac as the housing bubble blew up.
His 59-point economic plan contains not a single idea for reviving U.S. housing markets. This is a curious omission for someone running as “Mr. Fix-it” on the economy, since most economists view the housing slump as a major drag on recovery.
In contrast, Rep. Ryan is forthright and specific about getting government out of the business of backstopping the secondary market – calling it “crony capitalism” – and turning that job over to the private sector. The problem is, private capital has vanished from housing markets. It’s not clear that there is even enough private capital available to finance the $11 trillion mortgage market in the absence of a government guarantee.
Privatizing Fannie and Freddie will get the Tea Party’s juices flowing, but it won’t offer any relief to the millions of middle class homeowners saddled with “negative equity,” meaning they owe more than their houses are worth. Like many of the ideas in Rep. Ryan’s blueprint, it is an ideological rather than a pragmatic response to a real-world problem.
In contrast, President Obama has advocated a trio of practical if unduly modest initiatives for preventing foreclosures and reducing negative equity: home refinancing (HARP), mortgage modification (HAMP), and principal reduction. Republicans oppose federal efforts to throw a lifeline to distressed homeowners, even though one of the original architects of the home refinancing initiative, Columbia Business School Dean Glenn Hubbard, is a key Romney economic adviser.
President Obama also laid out a series of reforms 18 months ago addressing the fate of Fannie and Freddie. His approach calls for a smaller government role, but with an explicit government guarantee backing the mortgage market, a necessary component for widespread, affordable credit, while maintaining fixed rates. By mitigating risks of another systemic meltdown, these reforms encourage private capital to reenter housing markets.
The effect of Rep. Ryan’s privatization plan would be to limit access to fixed mortgage rates only to the most highly qualified borrowers. Low-to-moderate income families would find it harder to get financing, and minority home ownership rates would decline. That’s why progressives oppose a fully private market finance system.
Nonetheless, Ryan is right about one thing: It’s time for policy-makers to decide the future of the stricken mortgage giants one way or the other. There are encouraging signs that home prices have bottomed out and are beginning to rebound. Private investors are eyeing Fannie and Freddie’s large stock of foreclosed properties, many intending to convert the homes to investment properties to fulfill growing rental demand. Conditions are ripe for a serious debate about government’s role in housing. We know where Paul Ryan stands, but does Mitt Romney having anything of substance to contribute to such a debate?