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Federal National Mortgage Association
Federal Home Loan Mortgage Corp
Ocwen Financial Corp
In 2005, Congress passed a legislative horror popularly known as the transportation bill that, among other things, funded Alaska’s infamous “Bridge to Nowhere.” The bridge was never built, and the law itself may finally expire at the end of March.
Washington is now arguing over several bad new ways to pay for transportation infrastructure. Despite their deficiencies, recent proposals from the White House, the Senate, and the House offer a few ideas worth considering as part of a more ambitious funding bill down the road when a looming election isn’t inducing timidity and self-delusion.
Most glaringly, what the proposals lack is a realistic source of funding. The White House hopes to pay for its six-year, $476 billion plan by “ramping down” military operations. The Senate’s two-year, $109 billion measure would invoke such exotic revenue sources as raiding the Leaking Underground Storage Tank Trust Fund (also known as the LUST Trust Fund) and taxing imported Malaysian cars.
The five-year, $260 billion plan from House Republicans, meanwhile, envisions collecting revenue from currently nonexistent domestic drilling projects. (That plan—which Transportation Secretary Ray LaHood, a Republican, called “the worst transportation bill I’ve ever seen during 35 years of public service”—is so egregiously political and unfeasible that House Republicans now plan to rewrite it.)
The reason everyone is resorting to such sophistry is that the Highway Trust Fund, which gets the bulk of its revenue from a federal excise tax on gasoline of 18.4¢ per gallon, is nearly bankrupt. Because the tax isn’t adjusted for inflation and has been pegged at the same rate since 1993, it has covered less and less of U.S. transportation spending. The Congressional Budget Office says the fund could be insolvent as soon as October.
Why not just increase the gas tax? Plenty of wise people have advocated doing just that. The Simpson-Bowles fiscal-reform commission recommended an immediate increase of 15¢ per gallon. Republican Senators Mike Enzi (Wyo.) and Tom Coburn (Okla.) have sensibly suggested indexing the tax to inflation.
Raising the tax modestly in the short term might keep the trust fund solvent. But ultimately the federal gas tax is an insufficient mechanism. As cars grow more fuel-efficient—and as the federal government encourages new sources of energy and more conservation—revenue from the tax is certain to diminish. Not to mention that any action that would increase gas prices is a political nonstarter.
Finding a sustainable funding source will take a combination of creative approaches. The first is technological. One promising replacement for the gas tax is a “vehicle-miles-traveled fee,” which would use satellite tracking or a variety of other methods to charge drivers by mileage, regardless of the fuel they use. The technology required for widespread use of such a system is years away, and protecting privacy while monitoring driving habits will be a challenge. But the concept—placing the funding burden directly on those who use the roads—is a smart one.
Second, Congress should seek out more and better public-private partnerships for construction projects. The three proposals all increase cash for something called the Transportation Infrastructure Finance and Innovation Act (TIFIA), which provides credit assistance for big projects that include such partnerships. This is exactly what we need more of: In its 12 years of operation, according to a Bloomberg Government analysis, TIFIA has used $8.6 billion in federal money to attract more than $33 billion in investment. This isn’t free money, but it’s a smart way to spend.
Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA), was back on Capitol Hill on Feb. 28 explaining to lawmakers why he can’t—or won’t—let mortgage giants Fannie Mae (FNMA) and Freddie Mac (FMCC) forgive the debts of homeowners at risk of defaulting on their loans. He says debt forgiveness would result in untenable losses for the mortgage giants. This is a curious position given that President Barack Obama, Democratic lawmakers, and Federal Reserve Chairman Ben Bernanke have called on him to do it.
It’s no secret the housing market is dragging down the economy. Fannie and Freddie, which own or guarantee 60 percent of outstanding mortgages, are a critical part of any solution. Their loans account for about 3 million of the estimated 11 million underwater mortgages. The Obama administration has called on FHFA, which oversees Fannie and Freddie, to let the mortgage giants cut the principal balance for borrowers in danger of foreclosure. To make it worth their while, the U.S. Treasury recently offered to pay Fannie and Freddie as much as 63¢ for each dollar of principal that’s forgiven.
Fannie and Freddie could minimize losses by using a shared appreciation model, in which the companies agree to forgive a certain portion of a borrower’s debt in exchange for sharing in any future increase in the home’s value. The idea is already being employed with some success by private-sector mortgage servicers such as Ocwen Financial (OCN), which has used shared appreciation principal reductions in about 9,000 loans. Ocwen’s redefault rate on principal reductions is around 8 percent, vs. the 20 percent industry average for other types of modifications.
By requiring borrowers to give up a portion of what is most Americans’ largest investment, shared appreciation mitigates the biggest knocks against principal reduction: That the prospect of debt forgiveness could encourage more homeowners to default and that it rewards people for taking on more debt than they can handle.
To read Michael Kinsley on the U.S. economy under either party and Simon Johnson on the fiscal outlook, go to: Bloomberg.com/view.