Given the high expectations, and long wait, surrounding the Obama administration's proposal to create a new housing finance system, it was likely inevitable that it would disappoint. Critics said the plan was tepid, scant on key details and, in the words of Sen. Richard Shelby, "lacked a sense of urgency."
Although the decision to punt the decision back to Congress was not a surprise, some observers had at least held out hope that the administration would offer concrete, innovative ideas rather than vague concepts outlining the size of the government's footprint in the mortgage market.
So what were the three options it suggested?
All three would call for the unwinding of Fannie and Freddie and a significantly scaled-back government role in the market. The first option would create a privatized system where government backing would be limited only to the FHA and other programs. The second option would be roughly the same, but include a guarantee mechanism that in times of emergency would be grown to fill the gap left by the exit of private capital. A third option would be dismantle the GSEs and reduce the government's role, but create a catastrophic reinsurance plan.
Why did the white paper avoid endorsing a single plan?
Politics. The Obama administration is between a rock and a hard place, namely the Republican-controlled House and the Democratic-controlled Senate, not to mention the plethora of industry actors like the National Association of Realtors, mortgage lenders and banks. Any plan it suggested was almost certain to be hammered by all sides. Offering just vague directions on the way forward makes it easier to please the various competing constituencies while also appearing like they are moving forward.
So which option does the administration like?
Probably the third, although administration officials are forthright that all three options are imperfect. Ostensibly, it didn't endorse any of the plans, but most observers see the third option as the most practical for several reasons. For one, both options one and two run the risk of eliminating the 30-year fixed-rate mortgage, the traditional form of mortgage credit in the U.S. While some Republicans have suggested the country would be OK without that type of loan, big players in the mortgage market are likely to fight tooth and nail any attempt to restrict or eliminate it.
Is that the only reason?
No. As the administration acknowledges, option one does not allow the government much leeway to intercede in the event of a future crisis. During the current crisis, the government has been one of the only reliable ways to access mortgage credit. Without it, many agree most mortgages would not have been available during the past two years.
Option two theoretically gives the government a way to step in with some kind of guarantee, but the details of that have yet to be spelled out. The administration's paper essentially said it sounds like a good idea, but did not offer any sense for how it would work in practice.
There are also fears that options one and two will simply concentrate power in the mortgage market with the largest banks.
Who else likes the third option?
Plenty of market players have suggested versions of it. The Housing Policy Council, which publicly endorsed the third option on Friday, has called for the creation of a Federal Deposit Insurance Corp.-like system to backstop mortgage-backed securities.
So the third option is it?
Not so fast. There are still significant problems with the third option, including how the government would establish a price for its guarantee. Some Republicans have already said it is little better than the current system because it leaves the taxpayer potentially on the hook during another crisis. What happens next?
Unfortunately, while Fannie and Freddie collapsed two and a half years ago, the debate over their future has really only just begun. The administration has not addressed the trickiest problem—where to draw the line for government involvement.
