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Editorial: Mortgage crisis still begs for intervention

Fri., Feb. 3, 2012

What happens when the path to good intentions becomes more important than the destination? You wind up in a roadside ditch.

The Federal Home Loan Mortgage Corp. (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) were created to help Americans achieve the dream of homeownership. Fannie Mae emerged during the Great Depression to buy mortgages from lenders. Later, Freddie was created to give Fannie some competition. Both were converted into publicly traded companies.

This duo dominated the mortgage market because, despite becoming investor-owned, they nurtured the implicit assumption that the government would back them if they ran into financial difficulty. That turned out to be true when the government assumed control of both after the housing bubble burst. This bailout has cost taxpayers more than $150 billion, and the total is expected to grow.

What the government has found out is that running these entities like a business can be counterproductive to the original intent of placing Americans in homes. For example, business decisions aimed at preserving Freddie Mac are making it more difficult for homeowners to refinance their mortgages at today’s historically low interest rates. Without that option, some people could lose their homes because they can’t make the current payments.

An investigation by the nonprofit ProPublica journalism outfit and National Public Radio unearthed the details.

Last year, Freddie Mac Chief Executive Officer Charles Handelman said his organization was “helping financially strapped families reduce their mortgage costs through refinancing their mortgages.” But Freddie has tightened its lending standards, making it more difficult to refinance. Meanwhile, the investigation showed that widespread refinancing would’ve hurt Freddie’s investment portfolio, so it had no incentive to help hurting homeowners. Instead, it bet against refinancing.

While this might seem like blatant hypocrisy, it isn’t clear that the outcome was intentional. However, this does demonstrate one of the consequences of preserving an institution at the expense of its mission. Congress must find a way to phase out Fannie and Freddie, which had lost their way even before the housing crisis hit.

Meanwhile, an important question remains: What is the government doing to help people stay in their homes? The answer is not much. The Obama administration has offered small, ineffectual solutions. Congress has remained on the sidelines.

This inaction raises the prospects of more people walking away from their homes, which will further depress the housing market, increase the taxpayers’ bailout bill and hinder economic recovery.

The government needs to help struggling homeowners to forestall the tumbling of those dominoes. Under normal circumstances, we would oppose intervention, but there is greater harm to the economy in doing nothing.