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A punt on Fannie and Freddie

WASHINGTON IS up in arms over salaries at Fannie Mae and Freddie Mac. Federal regulators are publicly promising to sharply cut compensation for the companies’ next CEOs. A congressional committee is going a step further, and is trying to place every employee at the nationalized mortgage companies on the federal payroll.

It’s easy to get lathered up about Fannie and Freddie paying out millions in executive compensation. The federal rescue of the mortgage companies has cost more than $150 billion so far, making their bailout the costliest of the financial crisis. They’re paying their executives millions of dollars to lose billions.

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But when policymakers decry fat paychecks at Fannie and Freddie, they’re missing the real scandal. Congress has punted on an invitation to shut the mortgage companies down. Lawmakers haven’t made any serious attempts to implement President Obama’s plan for retiring the companies, or put forth an alternative of their own. They complain about a problem they have no interest in solving.

The July 2008 nationalization of Fannie Mae and Freddie Mac was supposed to be a temporary fix. The companies were bleeding cash because they hadn’t saved enough to cover all the souring mortgages they’d guaranteed, and they got a taxpayer-funded bottomless line of credit because their continued existence was needed to avoid a complete housing market shutdown. But the two companies have become even more intertwined with the American housing market since their nationalization. They stand behind half the country’s home mortgages, and they now back the vast majority of new mortgages being written today.

There would be no American housing market if Fannie Mae and Freddie Mac ceased to exist tomorrow. At the same time, their federal takeover was never supposed to be permanent. Fannie and Freddie’s nationalization was supposed to buy enough time to keep the housing market in one piece while policymakers replaced them. Instead, the federalization of the mortgage market has allowed policymakers to avoid making tough decisions about how to restructure the way Americans finance their homes.

Congress has been sitting on a blueprint for shutting down Fannie and Freddie for a year. Last February, the White House sent Congress a range of options for eliminating the mortgage firms. While the White House’s plans varied in the degrees to which they would keep the government in the housing business, even the least sweeping version would have handed 85 percent of the mortgage market to the private sector.

The Obama administration wasn’t asking Congress to turn off the lights at Fannie and Freddie cold turkey. It was, however, saying that the current setup, in which Fannie and Freddie limp from quarter to quarter on a swelling pile of taxpayer money, is unsustainable.

Lawmakers are complaining about a problem they have no interest in solving.

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But lawmakers aren’t responding. For Republicans, putting the mortgage industry back in private-sector hands means accepting more robust regulatory oversight. It means putting checks on mortgage costs and complexity, and it means forcing banks to hold enough capital to withstand market shocks like the one we’re going through now. For banks, the cost of owning the mortgage market is accepting the types of regulations they should have been operating under all along; the cost for congressional Republicans comes in admitting that government has a role in regulating the financial markets. If Congress isn’t willing to bear the costs of governing, it has no right to complain about the status quo.

Paul McMorrow is an associate editor at CommonWealth Magazine. His column appears regularly in the Globe.
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