Federal housing pilot program escalates risk

The global financial collapse was 15 years ago. The problems that caused it were numerous, but one of them involved the mortgage-lending giant Fannie Mae, whose vital role in home buying – and the excessive risks it took back then – almost brought down the world financial markets.

Now Fannie Mae is seeking more authority and the chance to shoulder additional risk and the federal government is considering it.

It should not. Fannie Mae wants to launch a pilot program that would allow it to take over title insurance from the thousands of small businesses that now offer it. That would not be good for anyone involved, especially the financial markets.

Title insurance is an important, though tiny, slice of the expenses paid when someone buys a house. It is a one-time fee that provides protection for as long as a homeowner owns the property. Title insurance protects homebuyers against expensive attorney fees and loss of property if surprise defects in the title are discovered later, such as tax liens, fraud, or title-document forgery.

The US government wants to lower the costs related to buying a house and make it more affordable for low and moderate-income families. Under the proposed pilot program, very few of the low-income families that are the intended beneficiaries would qualify for it. Fannie Mae’s proposal reportedly would target the pilot at homeowners who can afford a 20 percent down payment. That would exclude almost all of the low-income families it wants to serve because they rarely can afford to plunk down that much and few could pay 10 percent

Also, the fact that Fannie Mae would seek such a large down payment is a red flag. Fannie Mae clearly wants more money up front because it is taking on more risk and needs to offset it. Fannie Mae has no background in conducting title searches and providing title insurance and the insurance it is considering offering is what amounts to title insurance 'lite.'

Reducing closing costs for low and moderate-income families, on the other hand, is a good idea. As players in a dynamic industry and in response to the consumers they serve, title insurers have responded. In reaction to market forces, title insurance has become more affordable. The cost of title insurance has decreased seven percent since 2004, according to industry statistics.

The proposed pilot program would ignore these changes and centralize the market, placing more responsibility on an enterprise that is already under federal conservatorship because it mishandled risk in the past. Until Fannie Mae is sound enough to operate independently, giving it additional risk-bearing authority in the housing market is ill-advised.

The federal government should learn its lessons from 2008 and the recent collapse of Silicon Valley Bank and the subsequent bailout of depositors are additional warnings. The government doesn’t need to take extra gambles, especially through an enterprise that ran afoul of excess risk in the past. Fannie Mae should let the market work – and consumers to make their own choices – in a very competitive industry. Title insurers have been doing a good job and do not need government intervention to potentially make things worse.  

Charles Sauer (@CharlesSauer ) is president of the Market Institute. He has previously worked on Capitol Hill, for a governor, and for an academic think tank.


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