The following editorial first appeared in the Dallas Morning News:
Welcome to the insanity otherwise known as "reforming" mortgage giants Fannie Mae and Freddie Mac.
These two entities have cost taxpayers more than $148 billion in the current housing crisis, and the latest projections indicate that, if prices continue to fall sharply, we may pay an additional $124 billion in the next three years. Even a strong, rapid economic recovery - an unlikely scenario - would mean an additional $6 billion.
It's time to overhaul these government-backed mortgage operations, which own or guarantee more than half of the nation's $10.7 trillion in residential mortgages, so taxpayers don't ever again end up subsidizing private gains.
The financial reform passed earlier this year is supposed to prevent financial firms from becoming "too big to fail." But that law conveniently avoided cracking down on quasi-government institutions such as Fannie and Freddie. Despite tough talk from the Obama administration and Congress, neither has shown the political courage to act. If anything, the signals are frustratingly mixed.
Federal Deposit Insurance Corp. Chairman Sheila Bair recently said Fannie and Freddie should no longer look to Washington to backstop risky ventures, but, in the same breath, she cautioned that home ownership is so important that it may require "ongoing government support." Likewise, Treasury Secretary Timothy Geithner has mused about giving Fannie and Freddie an "elegant funeral" but then hinted that the government might continue playing a major role in the market.
Although Fannie and Freddie didn't cause the mortgage crisis, each stoked the inferno with wink-and-a-nod assurances that the government would bail out risky mortgage loans. Allowing the two operations to keep one foot in the private sector and the other in federal coffers tempts another crisis. Fannie and Freddie must be made to compete in the secondary mortgage market like every other private firm, with their own skin - not that of taxpayers - in the game.
The futures of Fannie and Freddie will be the focus of heated debate early next year. Some will argue that the housing recovery is still too weak to make massive changes or - even more foolishly - that changes aren't necessary. If the current debacle hasn't provided enough incentive for meaningful reform, what would? Allowing a repeat of our most recent housing meltdown would be the pinnacle of insanity.