President Barack Obama took the housing recovery into uncharted waters today by endorsing a bipartisan Senate blueprint for winding down Fannie Mae and Freddie Mac, the government-backed mortgage securers that formed the nucleus of the 2007-2009 financial panic.
A quick recap: Mounting non-performing loans on the balance sheets of some of the nation's biggest mortgage underwriters forced the U.S. government, at the time headed by President George W. Bush, to launch extraordinary interventions in the private economy. These actions, while sparing the country of an even more perilous financial meltdown, put taxpayers on the hook for trillions of dollars, many of which were tied up in the mortgage-backed securities (MBS) guaranteed by the federal government. These arrangements essentially created massive risk for the taxpaying public, a veritable chicken that came home to roost in the fall of 2008.
Flash-forward five years later, and debates held during that time in Congress have led to the current proposal. Efforts to shrink the MBS portfolios of Fannie and Freddie are set to continue at a faster pace, shifting the bulk of all U.S. mortgages into private hands.
"First, private capital should take a bigger role in the mortgage markets. I know that sounds confusing to folks who call me a socialist," the president said, according to The New York Times. "I believe that our housing system should operate where there's a limited government role," he added, "and private lending should be the backbone of the housing market."
How these moves will impact interest rates remain to be seen. Without an explicit government backstop, investors may demand a higher return on their risk. This may call for some folks to improve their income flows with alternative solutions, such as cash flow real estate, as the investment environment continues to be poisoned by government error.