Congress Should Never Have Created the Housing Finance GSEs

In the policy world, it is very easy to get bogged down in the details and miss the forest for the trees. The eruption of analysis following the Trump administration’s recent trade policy moves is a great example. Everyone is fighting over the economics of trade, but very few of us are focused on how trade policy relates to the underlying principles of the American system of government.

Housing finance is another great example.

Bill Pulte, the new Federal Housing Finance Agency director, has been at the center of a firestorm for “jettisoning executives and policies at breakneck speed.” Pulte’s moves have fueled speculation over what the administration will do with Fannie Mae and Freddie Mac, the two government-sponsored enterprises stuck in federal conservatorship since the 2008 financial crisis.

Unsurprisingly, most people are arguing about how important the GSEs are to the nation’s housing market. The debate is largely the same one that has played out since the federal government placed the two failed firms into conservatorship: Can a robust housing market exist without the GSEs?

As with trade policy, the economic questions really aren’t new, and everyone has their preferred statistics. For decades, conservatives have championed the GSEs because of the supposed importance of homeownership to civil society. Progressives, on the other hand, have largely stuck to the importance of having a place to live. And both sides have been more than happy to go along with the status quo, regardless of whether the GSEs make housing more affordable or expensive.

Fannie and Freddie Were Not Private Companies

As a result, Congress and three consecutive administrations have allowed the GSEs to remain in conservatorship. And as a recent Law and Liberty article by Alex Pollock and Ed Pinto points out, the GSEs remain insolvent.

Yet, the debate continues to center around whether the companies should be “released” from conservatorship and whether the resulting “private” companies can still support the mortgage market. Again, this is pretty much the same fight that’s been going on since the GSEs failed in 2008. (There’s also a contingent who insists the firms did not fail, and that all should be forgiven because the government forced the GSEs to take a bad/overly punitive deal.)

Here’s the core of the problem though: The GSEs were not private companies.

Private companies are not created by the federal government to purchase federally insured mortgages to keep lenders afloat. They don’t get reorganized with a special sponsorship because the president and Congress want to make the federal budget look better. They don’t get a standing line of credit with the U.S. Treasury. They don’t get an exemption from Securities and Exchange Commission registration requirements. (I am aware they voluntarily register now.) They don’t get protected from liquidation for nearly two decades.

So, the question cannot be, “Should we release the companies back into the private market?” They were not in the private market in the first place.

And that’s the part of the debate that very few people want to deal with. Unfortunately, it is the most critical part.

Members of Congress should ask themselves how we got here in the first place—not in the technical sense or as a matter of process. Instead, they should ask what would have happened had their predecessors not ditched the founding American principles related to limited government and private enterprise.

Fannie and Freddie Concentrate Benefits

For hundreds of years, it has been clear that the blending of public and private interests in the economy leads to special favors for some at the expense of others. It leads to an inefficient allocation of resources because a small number of people, for whom the benefits will be highly concentrated, can disperse costs among millions of people. It leads to the socialization of losses for private profits.

Although the American founders may not have stated it quite this way, they understood these ideas, which is evident by the checks and balances in the system they created. James Madison, for instance, wrote that even if “enlightened statesmen” were in charge, they would not be able to make all the “clashing interests” of private enterprise “subservient to the public good.”

They also knew that private markets allow businesses to best serve their customers, making it possible to earn profit. The result is a dynamic economy driven by entrepreneurs and innovations that help more people live more fulfilled lives.

Hands down, private markets beat patronage for the common good, so the government should not be able to easily and quickly intervene on behalf of any particular interest.

Fannie and Freddie Should Not Have Been Created

There can be exceptions, but the bar must be very high to keep the government heavily involved in private enterprise. And that bar has never been surpassed in the case of the GSEs—not when they were created, not when they were reorganized in the 1950s, not when they were reorganized in the 1960s, and not when they failed in 2008.

At each phase, the principles of limited government were ditched. So, nobody should be all that surprised that Americans are currently stuck with the prospect of guaranteeing nearly $8 trillion in mortgages and securities.

Dealing with the GSE problem will be expensive. The question is how that cost will be spread out and shared.

It’s clear, though, that the cost keeps getting higher because elected officials keep failing to stick to the principles of limited government and free enterprise. If members of Congress want to fix this mess finally, they should cut America’s losses with the GSEs. Doing so is long overdue.