This reform may be worth considering

A U.S. Senate committee has proposed eliminating mortgage giants Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Mortgage Corp.). Done responsibly, killing the two entities would be a good idea.

Banking and mortgage practices are enough to make the average person’s head spin. But suffice it to say, Fannie Mae and Freddie Mac were created by the government to make housing more affordable. They did so by purchasing mortgages from lenders, bundling them as bonds and selling them to investors. They also guarantee the mortgages against default.

Encouraged by federal rules including those that guided Fannie Mae and Freddie Mac, lenders for years handed out millions of mortgages irresponsibly, often to people who could not be counted upon to make the payments. In 2008, the bubble burst with massive defaults, leading to the “Great Recession.”

Now, both Democratic and Republican members of the Senate Banking, Housing and Urban Affairs Committee seem ready to do away with Fannie Mae and Freddie Mac. The idea is to replace them with a Federal Mortgage Insurance Corp. that still would have some role in the housing industry.

The less, the better, of course. Subsidizing mortgages can have unpleasant consequences, as we saw in 2008. It also can drive housing prices up.

Some special interests are using the issue for political purposes, against both Republican and Democratic senators.

Their scare tactics should be shunned.

At the same time, senators should not pass a bill that will result in even more government tinkering with the economy. Surely they understand by now their end-game should be just the opposite.


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