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Trump puts nation on course for higher mortgage rates

In the darkest days of the financial crisis, when the housing market was in free fall and threatening to take the nation’s economy with it, the Bush administration was forced to put mortgage giants Fannie Mae and Freddie Mac into government conservatorship.

The move was supposed to be short-lived. Then-Treasury secretary Hank Paulson described it as a “time-out” to give policymakers the breathing room they needed to “permanently address the structural issues presented.”

Yet 11 years later, remarkably, Fannie and Freddie remain stuck in time-out.

Though there has been a strong bipartisan consensus that legislative reform is needed, the political lift has turned out to be heavier than anyone expected.

The Trump administration has apparently had enough.

It announced earlier this month that it is going to let Fannie and Freddie out of conservatorship, whether Congress passes housing finance reform or not.

It is difficult to overstate how dramatic a move this is in the ongoing debate over what to do about the nation’s mortgage market. For virtually everyone involved in the debate over the last decade, housing finance reform has meant addressing the structural flaw that helped put Fannie and Freddie into conservatorship in the first place — the belief that they were too important for the government to allow to fail. This view pushed Fannie and Freddie shareholders toward greater and greater risk, knowing that they would get the upside should the risks pay off and taxpayers would get the downside should they fail.

In one proposal after another, experts and policymakers from the left and the right alike have tried to take on this so-called “too-big-to-fail” problem in their efforts to overhaul the system. Some have recommended creating enough competitors that Fannie and Freddie could be allowed to fail without devastating the market, while others have recommended putting the critical market infrastructure into a utility or government ownership.

This brings us back to the Trump administration’s plan, which threatens to abandon this central component of reform and release the duopoly back into private control — unless Congress acts.

That’s not to say that the administration would let Fannie and Freddie out of conservatorship without any reforms. It plans to increase their capital levels and take other steps to decrease their market share, including withdrawing their support for some kinds of mortgages and making it easier for banks and other financial institutions to compete at the margins. But these steps wouldn’t reduce their centrality to the system nearly enough that the government could ever allow them to fail.

While these steps won’t remove the too-big-to fail problem, they will make getting a mortgage more expensive — possibly much more expensive — for some homebuyers. Shrinking Fannie and Freddie’s footprint without structural reform will push many borrowers into a more selective and expensive private market and reduce the overall subsidy provided to low- and middle-income borrowers.

Why would anyone propose such a thing? It will unnerve those from both political parties who have long advocated for housing finance reform, because it’s not fixing one of the fundamental problems. And it will unnerve homeowners, lenders and realtors alike because it will drive up the cost of buying a home. Indeed, the only group likely to support it are Fannie and Freddie’s shareholders, which stand to reap a windfall of billions of dollars.

But therein may lie its strength. By committing us to a path that almost no one will like, the administration may be creating the environment to get real reform done.

There is some indication that this is what the Trump administration has in mind. It has made it clear that it would go down this unilateral path reluctantly, preferring Congress to provide the deeper reforms that only it can provide. And it has signaled that the legislative changes it would support look a lot like those that members of both parties have long advocated: adding more guarantors to reduce the dominance of Fannie and Freddie; giving all guarantors a broad duty to serve all markets, rich or poor; imposing on guarantors a utility-like regulated rate of return to ensure that communities of more modest means aren’t priced out of the market; and providing the same level of subsidy that we have today to lower costs for borrowers of modest means.

It’s unclear whether the administration is indeed pushing everyone to the negotiating table, or just so impatient for movement that it would welcome a world in which mortgages are more expensive and the mortgage system is again dependent on a privately owned and controlled duopoly. But the result is the same.

Whether out of boldness or rashness, the Trump administration has left us with a choice: legislate the structural reform that almost everyone wants or watch as this administration takes the mortgage market down a path that almost no one wants.

Either way, the 11 years of limbo appears about to end. Best to buckle up. It may be a bumpy ride.