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Trump plan for mortgage companies could be bad

U.S. Sen. Sherrod Brown is right to be concerned about a proposal to privatize two mortgage industry giants that have been under federal control for about a decade. But Brown, D-Ohio, may be missing the big picture.

Before the so-called “subprime mortgage crisis” several years ago, two quasi-private entities with long names shortened to Fannie Mae and Freddie Mac performed important roles in mortgage markets. They bought mortgages from private lenders, then sold them to investors. That helped banks and other primary lenders make credit available to homebuyers, by providing both money and by minimizing risk.

It turned out many of the mortgages should never have been made. When the balloon burst, many people lost their homes because they couldn’t make payments. Financial institutions suffered, too.

Fannie Mae and Freddie Mac had to be bailed out by the federal government, at a cost of $187 billion in taxpayers’ money. Because of that 2008 action, federal regulators assumed a large measure of control over the two entities. Now, President Donald Trump’s administration wants Freddie Mac and Fannie Mae to return to private-sector control. If that happens, the two mortgage giants would continue to benefit from guarantees that if they get in trouble in the future, Uncle Sam would bail them out.

In effect, they would have the enormous advantage of everyone dealing with them knowing that if they went under, the government would cover their liabilities. Fannie Mae and Freddie Mac fall into the “too big to fail” category. Small businesses do not have that luxury.

Critics of the Trump plan worry it could be setting the housing market up for another big collapse. They are right.

If Freddie Mac and Fannie Mae are privatized, both companies should be required to build up their own capital to guard against mistakes — and any hint of a return to the bad old days of mortgages for all would have to mean withdrawal of Washington’s bailout guarantee.

The government should not be involved in private-sector affairs, of course. But letting Fannie Mae and Freddie Mac privatize while retaining Washington’s safety net is reckless. Brown, who is the senior Democrat on the Senate Banking Committee, worries the plan “will make mortgages more expensive and harder to get.”

Obviously, any privatization plan should guard against that. But it also should not include federal incentives for lenders to make mortgages too easy to get. That, after all, caused the subprime mortgage crisis.

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