The North Bend Eagle


 

Act to protect taxpayers from 2008-style meltdown

Mary Le Arneal
Published 7/10/13

For many Americans, the economic crisis that began in 2007 is still deeply etched in our memories. Trillions of dollars in home equity and retirement savings vanished in what seemed like the blink of an eye. Foreclosures in 2008 set a record for the most in American history and the nation sank into the worst economic downturn since the Great Depression.

To make matters worse, as Americans were searching for ways to stop the bleeding, the federal government was preparing to bail out private mortgage lending enterprises Fannie Mae and Freddie Mac, to the tune of $188 billion in taxpayers’ dollars—money that has yet to be returned to the Treasury.

If this had been in place in 2008, taxpayer dollars would not have been needed to cover private losses at Freddie and Fannie.

The problem is that Fannie and Freddie, by law, were not allowed to hold capital to protect against losses, but still had obligations to pay investors who purchased their bundled mortgages, all backed by government guarantee. In other words, taxpayers were—and still are—on the hook.

Today, many Americans are still picking up the pieces, trying to restore a lifetime of savings. However, despite the raw memories of 2007 and 2008, little has been done to correct the flawed business model that led to taxpayer bailouts of the housing industry. And with nearly 90 percent of home loans backed by government guarantees, taxpayers are still at risk for future bailouts in the event of another economic skid.

History has a habit of repeating itself, so it is important that we take seriously the lessons of the past and work to prevent future bailouts at taxpayer expense. That’s why I’m helping to lead a bipartisan effort to take taxpayers off the hook for future blank checks—and make sure they are paid back for the last one.

The Housing Finance Reform and Taxpayer Protection Act shrinks the role of government in the housing finance industry, thereby reducing taxpayer risk.

The legislation phases out Fannie and Freddie, and requires private investors—those taking the risk—to set aside funds to cover the first 10 percent of any loss on mortgage-backed securities. It also creates a new insurance fund, similar to the Federal Deposit Insurance Corporation, which uses fees from market participants to cover more extreme losses resulting from downturns in the housing market.

This legislation also preserves the ability of small banks, lenders and credit unions to provide competitive 30-year fixed-rate mortgages. In addition, it creates a cooperative, mutually owned by these small banks and credit unions, to prevent community-based institutions from being swallowed up by very large banks. These local lenders are integral to the quality of life in small communities across Nebraska and the nation. They provide the resources to create new startups and grow family-owned community staples. They are an important cog in a thriving community, and it is so important that they have fair access to these markets.

If this legislation would have been in place before the 2008 meltdown, taxpayer dollars would not have been needed to cover private losses at Freddie and Fannie. The security this bill provides to local lenders is also important for the preservation of rural America. The bill provides good and necessary reforms to prevent future bailouts and ensure all lenders are operating on a level playing field. Congress should act on this legislation before history repeats itself, forcing taxpayers to write another check to cover a flawed business model of private profits and public losses.

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