During floor debate over the Dodd-Frank financial reform legislation, Republicans continually professed outrage that Democrats and the Obama administration pushed remaking the government sponsored mortgage enterprises (GSE’s) — Fannie Mae and Freddie Mac — to a later date. Delay made sense at the time, given the scope of the reform the GSE’s need, and now that they’re poised to take over the House of Representatives, Republicans are gearing up to tackle Fannie and Freddie.
When it comes to mortgage finance reform, many Republicans favor what American Banker called “pristine privatization,” or a system with literally no public mortgage support. Senate Banking Committee ranking member Richard Shelby (R-AL) has said he is “very skeptical” of preserving any federal role in mortgage finance, while many Republicans in the Senate favored a hugely irresponsible plan proposed by Sen. John McCain (R-AZ) that would have ended federal involvement in the mortgage market on a date certain. House Republicans have introduced legislation in the same vein.
But as David Min, associate director of financial markets policy at the Center for American Progress, wrote in The Hill today, we already know what this vision for the mortgage market looks like. Min noted that “prior to the 1930s, the United States had a purely private mortgage system in which the government played only a negligible role. This system failed the vast majority of Americans, as mortgages were extremely limited and hugely expensive, and only available to the wealthiest homebuyers”:
Residential mortgages prior to the 1930s had many of the same features as the unregulated subprime and so called Alt-A mortgages of the 2000s — they were short term, carried a variable rate of interest, and featured “bullet” payments of principal at term. These loans also required high down payments, often more than 50 percent, and despite their highly lender-friendly features had interest rates that were extraordinarily costly by today’s standards. Because home mortgages were scarce, expensive, high risk, and effectively limited to a narrow band of the wealthiest Americans, homeownership was far less attainable than it is today, with the middle class effectively shut out of the market.
And this system didn’t work for banks either, as extreme boom-and-bust cycles in an unregulated system regularly led to bank failures.
No one — even the housing guru Republicans love to hate, Rep. Barney Frank (D-MA) — is suggesting that Fannie and Freddie be preserved exactly as they are. But removing all government support for the mortgage market would take us back to an era when only the very wealthy had access to homeownership, while kicking the legs out from underneath the GSE’s at a time when they’re supporting 90 percent of the mortgage market.