It is time to end Fannie Mae and Freddie Mac. For over four years, Congress has failed to start the process of phasing out the two failed mortgage finance giants and replace them with a private-sector mortgage finance system. Most of the time, opponents used the excuse that housing markets were just too weak to do anything that might delay the housing recovery, leaving both entities to languish under the control of the Federal Housing Finance Agency (FHFA).

Instead, some in Congress and the Obama Administration have focused on a series of generally unsuccessful efforts to enable borrowers whose homes are now worth less than they owe to refinance the loans.[1] Undeterred by the underperformance of these programs, several Senators have decided to try again. Senate Majority Leader Harry Reid (D–NV) is expected to schedule Senate consideration in the lame-duck session of another refinancing bill by Senators Robert Menendez (D–NJ) and Barbara Boxer (D–CA).

As with past efforts, their approach would be a policy mistake. Congress should skip the sideshow and move instead to the main event of ending Fannie Mae and Freddie Mac.

Rationale for Mass Refinancing Is Ending

Driven by housing activists, Congress, and the executive branch, government agencies have focused on encouraging lenders to refinance underwater mortgages since mid-2007. Supporters justified their approach by noting that falling housing prices made it virtually impossible for borrowers to reduce the loans to a point where the worth of their houses would equal the amount that they owed. This has led many homeowners to simply walk away from their obligations, leaving their houses to be repossessed and further lowering property values in the area.

However, most of these programs have actually helped only a relatively small number of borrowers.[2] A recovering market with gradually rising prices will do much more to enable underwater borrowers to return to building equity. And there are firm signs that the long-awaited housing recovery is well underway, which would further obviate the need for mass refinancing.

In the third quarter, median sales prices increased over those of last year in 120 of 149 metropolitan areas,[3] with prices increasing an average of 5 percent over those of a year ago, the largest 12-month gain since July 2006. In addition, inventories are shrinking, with only 2.32 million existing homes available, a 20 percent drop from the same period in 2011, while the national median price of a single-family home has risen by 7.6 percent over the past 12 months.