Former undersecretary of state and founding executive director of the George W. Bush Institute James Glassman called the mortgage system that would be assembled under the Crapo-Johnson proposal for GSE reform “the Obamacare of real estate” for taking a top-down approach to reshaping nearly one-sixth of the US economy.

Fannie Mae Freddie Mac Glassman

There’s no question that the Crapo-Johnson plan is complex. It would create a new platform for securitizing mortgages, the Federal Mortgage Insurance Corporation (FMIC) to regulate that platform, a co-op so that small and medium sized banks can have access to the platform, and all the bureaucracy that goes along with those structures. Glassman is skeptical that the Federal government will be able to pull off the transition and end up with the efficient system as advertised.

He’s also concerned about bringing an additional $5.2 trillion in liabilities onto the Federal government’s balance sheets when Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) are absorbed into the proposed FMIC.

Glassman opposes explicit and implicit Federal mortgage guarantees

Instead of replacing implicit guarantees with explicit ones, Glassman wants to see the government get out of the mortgage market altogether, though he acknowledges that it could be difficult for the government to persuade markets that it wouldn’t bail out Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) in the event of another housing crisis. Glassman jokingly recommends having the president make a speech declaring that the government will never bail out the newly privatized entities, but it’s hard to see what effect that would really have if a housing crisis hits ten years from now.

He argues, as others have, that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) worked well for decades until underwriting standards were undermined in the 1990s, something that he expects to see happen again as long as mortgage reinsurance is overseen by the government.

Alternatives to Crapo-Johnson need to address future bailouts directly

Ironically, this concern about backsliding into the risky loans and weak underwriting standards that are partially to blame for the housing bubble are why there is so much political consensus around getting rid of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) in the first place. Whether they exist as part of the government or private entities, Fannie Mae and Freddie Mac are clearly too big to fail. The momentum building around Crapo-Johnson is at least partially due to the pains it takes to insulate taxpayers from another bailout. Critics should be looking for an equally compelling way to protect taxpayers for their arguments to gain further traction.