Taxpayers are both in awe of and enraged by the schizophrenic behavior of government officials and lawmakers when it comes to taking action on the nation’s thorniest public policy conundrums. Over and over, taxpayers hear the rhetoric emanating from Washington urging opportune and commonsense action to solve a host of public policy issues and then watch, with horror, as the administration and members of Congress fail to turn that lofty rhetoric into forward-moving action; instead, they often make matters even worse. The evolution of reform efforts vis-a-vis the nation’s housing giants Fannie Mae and Freddie Mac and the Federal Housing Administration (FHA) is a perfect case study in that phenomenon.

Fannie Mae and Freddie Mac, the nation’s massive government-sponsored enterprises (GSE), descended into bankruptcy in September 2008 and were taken under conservatorship by the U.S. Treasury. Since then, under the supervision of their regulator, the Federal Housing Finance Administration (FHFA), taxpayers have pumped hundreds of billions of dollars into propping up the two agencies. The GSEs currently own or guarantee half of all mortgages in the nation, worth $5 trillion, and back 90 percent of all new home loans.

Estimates of the long-term bailout costs vary. The Office of Management and Budget pegs the cost at around $130 billion. However, the Congressional Budget Office (CBO), which is using “fair value” accounting, estimates that the taxpayers will eventually be on the hook for closer to $320 billion. CBO views the GSEs as government agencies (which they are now, for all intents and purposes) and calculates the cost of the capital that has been pumped into the GSEs, the cost of buying shares of their stock, and the current cost of operating the entities. It is unlikely that the taxpayers will see any of this money returned to the Treasury. FHFA’s Acting Director Ed DeMarco has stated that “It ought to be clear to everyone at this point, given the (firms’) losses since being placed into conservatorship…(they) will not be able to earn their way back to a condition that allows them to emerge from conservatorship.”

The future of Fannie Mae and Freddie Mac will cast a pall on the federal budget for years to come. Having said that, even pro-GSE stalwarts like House Financial Services Committee Ranking member Barney Frank (D-Mass.) have called for the abolition of the GSE hybrid model of financing housing, although he fully supports the idea of explicit federal subsidization of the housing market. Furthermore, there is a growing consensus that it is time to force the federal government to retreat from the housing finance field and allow the private sector to reenter the market. In fact, in February, 2011, the Obama administration signaled that it had come to the same conclusion, when it released its roadmap back to the full privatization of housing finance, offering three possible routes toward shrinking government interference in the housing market.

Given the dramatic and extremely costly collapse of Fannie and Freddie, and the fact that the tide had begun turning away from government intervention in housing, it was stunning to see Sens. Robert Menendez (D-N.J.) and Jonny Isakson (R-Ga.) introduce legislation to subvert one of the few current opportunities for the private sector to expand its role in the housing market. On September 30, 2011, the loan limits for Fannie and Freddie, which had been increased to a stratospheric $729,000 with the passage of the American Recovery and Reinvestment Act (stimulus), had dropped back to pre-meltdown levels of $625,000. Allowing the loan levels to drop would have been a good (albeit first) step toward ditching the hybrid housing finance model that had seeded the 2007 collapse in the mortgage market. The Menendez-Isakson amendment, which passed the Senate by a vote of 60-38 as part of H.R. 2112, the “minibus” spending bill, would maintain the loan levels at $729,000 for the GSEs, as well as for the FHA’s taxpayer-backed federal mortgage insurance fund, which was originally created to help first-time and middle-income buyers purchase first homes. Allowing the GSEs to purchase and the FHA to insure loans up to $729,000 is a sop to the wealthiest homebuyers in the country.

In the ensuing struggle over the legislation in the House, which did not have a similar provision in its “minibus,” members of Congress cut a deal which would allow the loan levels for the GSEs to drop as scheduled. That left the FHA at the higher level, creating an unprecedented difference between the Fannie/Freddie and FHA levels, and producing an outcome that turns out to be the worst of all possible worlds.

Two days before the agreement was reached to push through the increased loan levels, the FHA’s annual audit report to Congress was released, documenting that the FHA’s capital reserve ratio, for the third year in a row, had dropped below its congressionally-mandated 2 percent level. The FHA, which insures more than $1 trillion in mortgage assets, has seen its share of the mortgage insurance market grow from its historic level of 5 percent of the market (the rest was made up by private mortgage insurance companies) to 30 percent. The FHA audit stated that the fund has a fifty-fifty chance of needing a taxpayer bailout. That estimate is predicated on the assumption that housing prices will rise by 18 percent over the next several years, when most analysts expect housing prices to rise by no more than about 8 percent, if at all.

According to Christopher Papagianis, managing director of Economics21, “Along with Fannie Mae and Freddie Mac, the FHA is the third leg of the government stool supporting the entire housing market…What is embarrassing for Congress is that, unlike Fannie and Freddie, the FHA is directly under their purview. It’s always been a government agency, subject to hearings and oversight. They clearly haven’t been minding the store, given this report.”

The loan limit language was signed into law by President Obama on November 18, 2011. After taking some positive steps toward re-engaging the private sector in the mortgage business, Congress managed to stymie future attempts to unwind Fannie and Freddie, saddle the taxpayer-backed FHA insurance fund with more risk, and sow the seeds of the next potential multi-billion dollar taxpayer bailout of the housing market. Just another schizophrenic day in Washington, D.C.