Key House Republican Prepares To Destroy The 30-Year Mortgage

In the last few weeks, House Republicans have swiftly walked back their promises to completely overhaul the two government sponsored mortgage entities — Fannie Mae and Freddie Mac — after using the two mortgage giants, and their seemingly constant need for government support, to score political points during the 2010 campaign. The reality that they are currently supporting 90 percent of the mortgage market seemed to have severely watered-down the GOP’s zeal for kicking the legs out from beneath Fannie and Freddie.

However, Rep. Scott Garrett (R-NJ), who as chairman of the House Financial Services Committee’s capital markets subcommittee will play a big role in mortgage finance reform, told American Banker today that, “we are not backpedaling at all.” “We are still going full ahead,” Garrett said, while laying out the GOP’s vision for reform:

Garrett said the Republicans would probably reject anything that calls for a government mortgage guarantee. “We’re certainly not leaning that way”…To critics who assert that removing any government backing would effectively eliminate the 30-year fixed mortgage, Garrett’s response was, “that remains to be seen,” and “Is there an alternative?”

While a fully privatized mortgage market makes sense in conservative fantasyland, in reality, shifting to such a market would cause a huge mess, almost inevitably destroy the 30-year, fixed-rate mortgage that so many Americans depend upon. As CAP’s David Min wrote, “a full withdrawal of the federal government from the mortgage markets would lead to radical and catastrophic changes in the U.S. mortgage markets and thus our housing markets, including”:

Limited availability of long-term, fixed-rate mortgages

Sharp increases in the cost of mortgages

Large reductions in the availability of mortgage credit

A higher systemic susceptibility to housing bubbles

Here’s a fuller explanation for why all of these adverse effects would come to pass. And it’s no mystery as to what a completely privatized mortgage market would look like. After all, the U.S. had one in the 1930’s, when mortgages were expensive, high-risk, and could only be afforded by the richest Americans. And this system was no good for the banking industry either, which experienced several boom-and-bust cycles.

Fannie and Freddie absolutely have to be reformed, as the current setup in which they guarantee nearly the entire mortgage market is simply untenable. But cutting the government entirely out of the mortgage finance arena, as Garrett suggests, would take the country back to a pre-Depression era of homeownership, when the wealthy could afford homes, but everyone else was left out in the cold.