Losses are mounting. The situation shows no sign of getting better. It’s clear that U.S. government intervention has made the problem only worse. The economy has been directly affected and Americans exposed to trillions in new debt risk. Leaders now talk of redoubling government efforts. It’s time for a change in course … in federal housing policy.

In the second half of 2007, Fannie Mae and Freddie Mac — the two government-sponsored enterprises (GSEs) created to help Americans afford homes — recorded losses totaling about $9 billion. The National Association of Home Builders predicts prices and housing starts likely will drop through 2008.

The Federal Housing Administration (FHA) increased its portfolio of no-down-payment loans from 2 percent to 37 percent between 2000 and 2007. These loans default at almost three times the rate of other loans. Freddie and Fannie either guaranteed, or hold themselves, mortgage-backed securities totaling $5.2 trillion.

The housing stimulus bill  favored in Congress would increase Freddie and Fannie’s exposure to risk by raising the cap and the size of loans they can buy. U.S. taxpayers can’t afford this further involvement in the housing debacle. We need a new course.

First, Congress must hold the line on existing federal interference with the market. Fannie and Freddie were involved in about 76 percent of all new home loans last year, and that figure may top 80 percent this year.

The FHA bailout plan favored in Congress will undermine already successful voluntary efforts by the private sector and non-profit groups. The plan ought to be rejected or at least limited to protect taxpayers as much as possible.

Also, any new housing package should not increase the cap on the size of mortgages Fannie and Freddie can buy. The government should reduce its role in the mortgage market instead of expanding it and crowding out private companies. In the long term, the federal government should look to reduce the co-monopoly position Fannie and Freddie enjoy in the home mortgage industry.

Freddie Mac CEO Richard Syron, defending his government protections in USA Today,  writes: “We are a shareholder-owned company using private capital — not taxpayer funds — to achieve our mission.” Syron fails to mention the many federal benefits Freddie maintains, including guaranteed access to federal credit and the Federal Reserve’s authority to buy its debt. These advantages encourage global financial markets to view Freddie and Fannie debt as federally guaranteed.

Once the current crisis has subsided, Congress should seek to phase out Fannie and Freddie’s line of credit and eliminate the Fed’s authority to buy their debt. Only when the government ends these special privileges will taxpayer risk and exposure be reduced and competition in the residential mortgage market restored.

Quick Hits:

  • Unable to fulfill their promise to end the Iraq war, Democrats are plotting “a guns-for-butter strategy to try to force Bush to accept new domestic spending in exchange for the money he needs to fight the war.”
  • To meet the carbon emissions goals promised by Hillary Clinton and Barack Obama (80 percent reduction by 2050), the U.S. would have to reduce overall emissions to 1910 levels … when the U.S. had a population of 92 million and the average income was  $6,000. That same goal would require U.S. per capita emissions to be lowered to levels seen only in Belize, Haiti and Somalia.
  • Siding with workers who want higher pay and more benefits, Venezuela President Hugo Chavez is threatening to nationalize the nation’s largest steelmaker.
  • Despite past rolling blackouts and the certain promise of more disruptions, environmentalists are blocking creation of new power lines through a state park in California.
  • After Barack Obama’s debate statement comparing Sen. Tom Coburn (R-Okla.) to former Weather Underground terrorist William Ayers, the Illinois senator called Coburn to say he didn’t mean to imply moral equivalence between the two men’s beliefs.