Government

When Mortgage Borrowers Don't Pay, Should Taxpayers Be On The Hook?

Or, to re-phrase the headline in a more boring way: What, if anything, should replace Fannie Mae and Freddie Mac?

It's a hugely important question. The bailout of the two companies has cost taxpayers well over $100 billion.

And the mortgage market is still being propped up by the federal government. For roughly 90 percent of the new mortgages being issued in this country, taxpayers are on the hook if borrowers don't pay.

Specific ideas about what to do next have been scarce in Congress. But a bill introduced today has bipartisan support, and lays out a clear plan.

Mortgage Market On Life Support

Share of mortgages backed by Fannie and Freddie, other government agencies and the private market.

Government support for mortgages

The plan resembles the world of Fannie and Freddie in some key ways.

Private companies would buy mortgages from banks, bundle them into securities, and sell them to investors. This is exactly what Fannie and Freddie did, and they were also private companies.

But there would be some important differences as well.

Under the new plan, the mortgage securities would be explicitly guaranteed by the federal government. (Fannie and Freddie didn't have an explicit guarantee, but their implicit guarantee allowed them to make huge profits.)

The private companies selling the securities would pay into an insurance fund that would cover mortgage losses. So taxpayers would only be on the hook if the insurance fund got wiped out. This is the same model used by the FDIC, which guarantees money in ordinary savings and checking accounts.

What's more, the private companies would be required to hold more capital then Fannie and Freddie — in other words, they'd have a bigger financial safety cushion.

The idea behind the new bill is to split the difference between those who want the government entirely out of the mortgage market, and those who want the government to stay in the market in a big way. It's sponsored by Rep. John Campbell, a Republican from California, and Rep. Gary Peters, a Democrat from Michigan.

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