The Obama administration has promised to roll out its ideas for fixing Fannie and Freddie early this year. Anticipating that, the Center for American Progress (CAP), a liberal think tank with ties to the administration, has proposed new entities called chartered mortgage-backed securities issuers (CMIs): privately owned firms that would package mortgages into securities and sell them with an explicit federal guarantee. Securitization fees would go into an insurance fund to protect taxpayers against defaults. Profits and product lines would be tightly limited by federal regulatorsThe last thing the government distorted housing finance market needs is more government controls and distortions. But that looks as though exactly where things are headed. CAP's proposal seems to be nothing but Karl Marx's call in his 1875 Critique of the Gotha Program:"From each according to his ability, to each according to his need."
The CAP proposal grapples with the fundamental problem of the old Fannie and Freddie: An implicit government guarantee permitted them cheap access to borrowed funds, which they gambled in pursuit of maximum returns to shareholders. It also wisely emphasizes that the new organizations must help rebalance federal support between rental housing and single-family homes. However, the CAP proposal would leave the new companies under political pressure to meet difficult-to-define "public purposes," such as funneling liquidity to "under-served" geographical areas. This seems not only risky but redundant, given the Federal Housing Administration's support for homebuyers of modest means.
A public-utility model for replacing Fannie and Freddie is plausible.
Under Obama and Rahm Emanuel the CAP proposal will be further twisted to make sure Goldman Sachs and the like do get to keep their fees, and don't be surprised if houses built by union workers suddenly become the houses of choice that are financed out of CAP program.