Gov't housing goals for the poor risk new bailout: US official

After a $148 billion-plus bailout, continued losses, and a refusal by Bank of America and other giant lenders, so far, to eat all their bad home loans instead of passing them on to taxpayers, why hasn't the US government fixed troubled housing finance agencies Fannie Mae and Freddie Mac?

"Policy makers deemed the situation to be too volatile to tackle" in Obama's bank reform bill, and some in Congress still say "now is not the time," given the "weak" housing market, FBR Capital Markets analysts Edward Mills and Paul J. Miller Jr. tell clients in a report today. 

"This is a complex issue, with many competing interest groups and a political divide," and "we will have to see what the outcome of the midterm elections will be," since the rising Republicans are more skeptical of government guarantees and low-income housing subsidies than today's ruling Democrats.

Any predictions? "Early indications point to a continued government role in housing finance," probably through a single government-supported, non-investor-owned finance company.

In his testimony, Fannie-Freddie regulator Edward J. DeMarco weighed in against increasing the government's already large and "implicit" financial support for the mortgage market: An "explicit" government mortgage guarantee "does not resolve" the obvious conflicts of interest in using government subsidies to promote government housing goals, "and it may produce its own problems." 

If the government guarantees most mortgages, DeMarco added, "it would likely want a say with regard to the allocation or pricing of mortgage credit" to, for example, racial minority groups or low-income neighborhoods. "The potential distortion of the pricing of credit risk from such government involvement risks further taxpayer involvement." 

Also: "Explicit credit support" plus continued federal tax breaks for most US mortgages "would further direct our nation's investment dollars toward housing," DeMarco concludes. Do we really want that?

Links to testimony by Treasury housing boss Michael S. Barr and Fannie-Freddie regulator Edward J. DeMarco here.