In the financial reform bill that passed last year, there was only one requirement with respect to mortgage giants Fannie Mae and Freddie Mac. President Barack Obama had to come up with a plan for reforming them by Jan. 31, 2011.
Unfortunately, it proved too difficult for the White House to meet its own deadline. Obama has now moved the due date to mid-February. And in response to Republican complaints that Obama has been dragging his feet on the issue ever since his inauguration, the Treasury Department has dared House Republicans to go ahead and pass something themselves.
It is not the first time Obama has kicked this can down the road. In March 2009, White House economics adviser Christina Romer said reform of Fannie and Freddie should be part of the overall financial regulatory reform. When the reform bill passed in 2010, Fannie and Freddie were not included. In June 2009, the White House published a white paper on financial reform, promising a wide-ranging initiative to develop recommendations on the future of the mortgage giants by February 2010.
That initiative never materialized, and the recommendations did not either. Two years after Obama became president, and two years after the two government-sponsored entities played a crucial role in bringing the economy to its knees, there is still no evidence that any serious work has been done in the White House or among Democratic congressional leaders.
There are several critical concerns about the future of Fannie and Freddie that are affecting markets even now, and the government’s failure to address this government-created problem is hurting the market. If the support of Fannie and Freddie is suddenly removed from the secondary mortgage market without any replacement, housing prices will plummet. On the other hand, government involvement in the market put us in this mess in the first place, as political concerns drove risky lending practices to new heights, and it could easily do so again.
There are possible solutions. Peter Wallison, the American Enterprise Institute expert who predicted Fannie and Freddie’s downfall nine years before it occurred, has suggested moving toward the covered-bond system used in Europe, which leaves banks with skin in the game and creates far-more-secure investments than the mortgage-backed securities that brought down our financial market.
Wallison’s is just one idea among many, but it is one more idea than we have seen come out of this White House so far. There will be plenty of opportunities for Obama to engage in rhetorical jousting with House Republicans. He should instead show some leadership on this issue.