Op-Ed: Privatization Alone Won't Fix Housing Mess

The Obama administration has advocated closing government-backed mortgage providers Fannie Mae and Freddie Mac. The New York Times' Gretchen Morgenson says the U.S. government still has an important role to play when it comes to home ownership.

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REBECCA ROBERTS, host:

And now, the Opinion Page. Last week, the Obama administration outlined a plan to fix the housing market, starting with winding down Fannie Mae and Freddie Mac. So how does the government keep money flowing in support of homeownership while making sure people don't borrow more money than they should and preventing another housing crisis?

In an opinion piece for The New York Times, columnist Gretchen Morgenson imagines a life without the Fannie and the Freddie. She asks, why not work toward a system where the government is solely the home lender of last resort?

We want to hear from you. What do you think the role of government should be in homeownership? 800-989-8255 is our phone number. Our email address is talk@npr.org, and you can join the conversation at our website. Go to npr.org and click on TALK OF THE NATION.

Gretchen Morgenson joins us via Skype from The New York Times. Gretchen Morgenson, welcome to TALK OF THE NATION.

Ms. GRETCHEN MORGENSON (Columnist, The New York Times): Thanks for having me. Glad to be here.

ROBERTS: So you say in your piece imagining life without Fannie and Freddie, that the private market should operate the housing market to a certain extent?

Ms. MORGENSON: Well, as you know, this is the way it's operated in most parts of the world and, you know, quite successfully. We, of course, have been mightily spoiled in this country ever since Fannie Mae was created out of the Depression era of the '30s. We've been spoiled into believing that, you know, the 30-year fixed-rate mortgage is, you know, the thing that we all are entitled to.

And unfortunately, what has happened, as we all saw during the housing boom, is that these kinds of mortgages that were backed by - ultimately by the government in these government-sponsored enterprises really resulted in now hideous losses that the taxpayers have to have.

ROBERTS: So, I mean, when you say that we feel that we're entitled to a 30-year fixed-rate mortgage, there's a lot of structure that goes along to help us feel that way. You know, there's the tax breaks for your mortgage. There's a lot of other structural things in place to lead Americans down that road.

Ms. MORGENSON: Absolutely. We have had a policy in this country of encouraging homeownership, and it has been sort of a belief that, you know, everyone should own a home or as many people should own a home as is possible because homeownership is good for neighborhoods. It's a win-win for everyone.

But I think that what we can agree on is that homeownership if it's extended to people who truly cannot afford it - perhaps don't have the down payment necessary, you know, to put down to make a mortgage less risky, maybe can't keep up the property - that really renting is a fine option for many people in this country.

So I think we have to, you know, step back a moment and look at that policy focus that has been just pro-homeownership all the way.

ROBERTS: You know, it's interesting looking through the Obama administration's plan, there were a couple of sentences about, you know, for people who can't or don't want to own a home, encouraging rental properties near good schools, you know, would make a difference. Is that the first time you've seen even a cursory nod towards that oddity?

Ms. MORGENSON: Well, you know, it really was drowned out. I think there were people who were, you know, sort of saying, look, renting is not, you know, a second-class option here. Renting is something that should be viable for many people.

You know, the responsibilities of homeownership are great, and it's just not for everyone. Obviously, the portability, of course, is another problem. If you have a job that transports you somewhere and you have a home you cannot sell, you're sort of trapped there. So renting has a lot of things going for it. But I think in the '95 to sort of 2008 period, it was really a pro-homeownership, you know, mentality that really dominated the policy discussion.

ROBERTS: And not just homeownership but actually having debt in your home as opposed to having equity in your home.

Ms. MORGENSON: That's really what I think is an important conversation to start having now, and that is that a lot of the policy in this country around homeownership has been focused on rewarding people to amass debt in the properties, i.e., the home interest mortgage deduction, really encourages people to buy more house than they, perhaps, can afford because the government will subsidize your mortgage interest every year on your tax return.

Why not instead think about a way to really promote adding to the equity in your home? I mean, where we are now is a situation where homeowners are underwater. They don't have any equity left in their homes. These were supposed to be their retirement nest egg in many cases. Now, that has gone. And so if we want to really start speaking honestly about homeownership, we should encourage the use of - and the - this sort of focus on gaining equity in these properties rather than debt.

ROBERTS: Let's hear from Caroline(ph) in Anchorage, Alaska. Caroline, welcome to TALK OF THE NATION.

CAROLINE (Caller): Yes, good morning. In addition to some of the wonderful suggestions this lady has made about gaining equity and not debt, I think we should look at how it ran successfully before President Johnson sold 50 percent of it to the private markets. It was run under the government with accountants basically making the decisions. And during the Vietnam War, he wanted both guns and butter, and this was one of the ways he got the money for that. So I think we need to look at the success that it had before and how was that done. Of course, times have changed. People need to move for jobs. And so there should be a lot -some changes. But we need to look at how was it successful in the past.

ROBERTS: Caroline, thank you.

Ms. MORGENSON: (Unintelligible).

ROBERTS: Yeah. Got you. Yes.

Ms. MORGENSON: Caroline, you could not be more spot on. You are dead right. Because what happened is - and you'll see this in the Treasury's report - what happened when Fanny Mae became a quasi public/private institution, i.e., it had shareholders that it needed to satisfy and, you know, earnings, numbers that it had to make, it really became perverted and really started on this path of growing its portfolio into this dangerous territory that we now find ourselves in.

So you are absolutely that Johnson's decision to semi-privatize the company was really the beginning of it going down a road towards a focus on profitability and an expansion of its footprint that really, really left the taxpayers holding the bag.

ROBERTS: Although, in the shorter term - obviously, the Johnson administration was 45 years ago - the Fannie- and Freddie-backed loans were not the riskiest at the outset of this housing bubble. It really sort of tipped when they started to maximize their profits really only in the last five or six years.

Ms. MORGENSON: That's correct. They were doing pretty, you know, typical solid mortgages but really started to go down the path of the subprime or the, you know, more risky mortgages in 2005, 2006, 2007. Now keep in mind that Countrywide Financial which, of course, was a huge subprime lender and ultimately got into trouble because of it, was Fannie Mae's biggest supplier of mortgages.

ROBERTS: Let's take a call from Virgil(ph) in Lynchburg, Virginia. Virgil, welcome to TALK OF THE NATION.

VIRGIL (Caller): Hi. Long time listener, first time caller. I agree that the federal government shouldn't be in the home loan ownership business. But my concern would be how would minorities fare in obtaining private loans since private industry is not very - doesn't have a good track record for loaning to minorities.

ROBERTS: Well, this gets into the question, Gretchen Morgenson, about what is the appropriate role of government in mortgages at all if there is a role for a government to, say, combat discrimination.

Ms. MORGENSON: Well, you know, that is something that we have spoken about a lot when talking about housing policy. That was a great deal of the homeownership push was to try to provide homeownership opportunities to people who were first-time homebuyers who had never had the option before. And these were some of the products that - unfortunately, you know, the unintended consequences department were some of the most poisonous loans.

So, you know, what you wound up happening was, the road to good intentions, et cetera, became where minorities or first-time homebuyers were really sucked into buying - taking on mortgages that really almost guaranteed that they would not be able to keep their homes.

And so you have a really perverse situation where the people that you wanted most to help are those that are then most hurt. You see them in foreclosures. You see so many really impoverished people who thought that they were getting the American dream and then it turned into a nightmare.

ROBERTS: So how do you learn from that mistake? How do you keep the good intention but have a more effective policy?

Ms. MORGENSON: Well, again, it goes back to the issue of debt versus equity. I think that one way to try to encourage first-time homebuyers to do so if they have, you know, some sort of a down payment, is to, again, perhaps talk about a tax credit for the amount that they would put down. You know, again, rewarding them for having skin in the game, rewarding them for having equity in the home, which is really what every one wants in the first place. And rewarding them for, really, having to take on less debt than they would have done and did do during this crisis, where it was anything-goes lending, 100 percent financing, even 125 percent financing.

ROBERTS: My guest is Gretchen Morgenson. She has an opinion piece in Saturday's New York Times called "Imagining Life Without Fannie and Freddie." You can find a link to it on npr.org at TALK OF THE NATION. And you're listening to TALK OF THE NATION from NPR News.

Gretchen Morgenson, we have an email from Rudolph(ph) in Kansas City, Missouri. He says: The government should get out of the business of backing up home loans. If there were no backups, then less people would get loans, but the loans that would be given out would be better. Every one in America does not deserve to own a mortgage. There is a lot of responsibility that comes with home mortgage ownership.

Do you agree with that?

Ms. MORGENSON: Well, I think I agree with that because we obviously have just been through a period where the outcome was so disastrous for the taxpayers. It was also disastrous for the first-time homebuyers that I was just describing a moment ago, who thought that they were getting in on something that was going to really be a financial success for them and then are, you know, foreclosed upon or are homeless, left without any place to live, the upheaval that's involved.

So, you know, I think that we have seen the absolute worst outcome of what were perhaps the good intentions of housing policy in America, and I think we really have to rethink everything. So I would agree that the government has not proven able to monitor these situations, to monitor these businesses in an - successfully in a vigilant-enough way to make sure that we don't get into this kind of a real, bad mess.

ROBERTS: Let's hear from Francis(ph) in San Ramon, California. Francis, welcome to TALK OF THE NATION. Francis, are you with us? Let's try Jim(ph) in Santa Rosa. Jim, in Santa Rosa, California, welcome to TALK OF THE NATION.

JIM (Caller): Thank you so much. And thank you for providing a much-needed, interactive forum right now.

ROBERTS: You're welcome. Thanks for joining us.

JIM: I would submit to you that the mortgage crisis and the molestation of our free market is all part of the same agenda and that this was carefully orchestrated...

ROBERTS: By whom, Jim?

JIM: The globalists that are basically running our show. I would submit to you that Agenda 21, this is one of many tentacles that are affecting primarily many factors of our life, but they realize the importance of property ownership. That is why our property rights and why the rug is being pulled out from so many Americans. And so the whole "mistakes," quote, unquote, that were made regarding bulked foreclosures are all part of the same thing.

ROBERTS: Jim, thank you so much for your call. Now, Gretchen Morgenson, of course, this conversation is being had in an atmosphere where there is a stronger voice, at least in the Congress, of, you know, a pretty serious libertarian streak; that government regulation, government involvement, in general, should be taking a big step back.

Ms. MORGENSON: That's true. You know, I would say that under, perhaps, different circumstances that line of reasoning would have less traction, but we absolutely are staring at $150 billion in losses at Fannie and Freddie right now. And so, you know, even if you were to just simply look at it from the - in that prism, you would have to say that, gosh, something went really awry here. And the government was involved very integrally in this and so let's question that involvement.

So even if you take it out of the political spectrum of whether you're talking about libertarianism, conservativism, liberal - we have seen this be the disaster that it has turned in to and that's pretty - it's pretty obvious and it's in black and white right in front of us.

ROBERTS: Well, you know, you say in your piece in The New York Times the debate over how to put the Treasury's ideas into effect will soon become a brawl. So practically, what happens next? A suggestion is out there, but how does it move forward?

Ms. MORGENSON: Well, the Treasury actually made three suggestions or three options, you know? And now, the - let the food fight begin, essentially. You are obviously always going to have people lined up on both sides of this. They're going to say the government must be involved. There are those who will say that because the current mortgage market is still frozen as a result. The private label mortgage market is frozen as a result of the crisis. So, you know, people will justify a government involvement because of that. And, yes, the Treasury says we have to wind Fannie and Freddie down slowly because they are the only ones supplying money for housing right now.

But, you know, we do have a bad experience that we can point to as saying this is surely not the way to do it. But I just hope that we can transcend politics, that seems unlikely, but I hope that we can really start talking about the perverse incentive that were in place here and how to eliminate them going forward.

ROBERTS: Gretchen Morgenson is assistant business and financial editor and a columnist for The New York Times, where her piece "Imagining Life Without Fannie and Freddie" ran on February 12th. Thank you so much for joining us.

Ms. MORGENSON: Thank you.

ROBERTS: And there's a link to that piece on our website. Go to NPR, click on TALK OF THE NATION. Gretchen Morgenson joined us from Skype from The New York Times. This is TALK OF THE NATION from NPR News. I'm Rebecca Roberts.

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