Last week the Trump administration released a plan for a major reorganization of the federal government. Many of the ideas in the plan mirror those in The Heritage Foundation’s Blueprint for Reorganization, and Heritage’s Rachel Greszler notes that, overall, the administration’s planrepresents “commonsense proposals that will serve the American people over the federal bureaucracy.”

Indeed, Americans deserve no less. As Greszler notes, however, the reorganization plan is not without flaws.

One of the most glaring weaknesses is the administration’s view of the federal role in mortgage finance. Although the plan touts many important housing finance reforms, it misses an opportunity to advocate getting the government out of financial markets.

For instance, the plan accurately states the following:

The U.S. housing market is supported by a complex system of Federal subsidies and programs intended to make mortgage financing accessible to a wide range of homebuyers. However, this system is challenged by the operation of two privately-owned Government sponsored-enterprises (GSEs), Fannie Mae and Freddie Mac, in conservatorship, a condition that has been maintained since 2008, in addition to overlapping and sometimes conflicting Federal goals. The Federal role in support of housing finance is not effectively targeted to households in need of assistance or sufficiently accountable to taxpayers, as the costs and benefits of that support are unclear.

The plan then calls for ending the conservatorship of Fannie Mae and Freddie Mac, as well as for “better tailoring of delivery of Federal programs.” The plan even argues it is time to level “the playing field with the private sector to decrease the Federal subsidies supporting housing.”

All of these ideas sound great. Unfortunately, the proposal also calls for expanding the federal government’s role in mortgage finance. Under the administration’s plan:

Both Fannie Mae and Freddie Mac, as well as other competitive entrants, would have access to an explicit Federal guarantee for mortgage-backed securities (MBS) that they issue that is only exposed in limited, exigent circumstances. Such a guarantee would be on-budget and fully paid-for. This would also ensure that the Government’s role is more transparent and accountable to taxpayers, minimize the risk of taxpayer-funded bailouts, and ensure that mortgage credit continues to be available in times of market stress for creditworthy borrowers.

There’s no doubt that this sort of system would be more transparent than the pre-2008 system, but improvements in transparency do not justify providing investors – for any class of private securities – explicit federal backing. Even in so-called “limited, exigent circumstances.”

There is always a major short-term memory problem in Washington, D.C., but this type of system sounds an awful lot like the pre-crisis system, when investors in mortgage backed securities (MBS) had very little to worry about in the case of anything other than a catastrophe.

And though there was no explicit statement of government support, there was never any doubt that the federal government would step in if disaster struck.

The notion that making such support explicit is going to make anyone more “accountable to taxpayers” and “minimize the risk of taxpayer-funded bailouts” is pure fantasy. The GSEs will never hold enough capital, and no government agency will ever charge adequate fees, to cover a major crisis without additional taxpayer support.

Explicit guarantees are nothing more than a giant giveaway to the many special interests that have been blocking real reforms that would actually protect taxpayers.

The only way to truly protect taxpayers is to shrink the government’s role in mortgage finance and to tell these special interests that they’ll have to compete and cover their own losses just like everyone else. That’s how a market-based economy provides more benefits to more people than an economy that is intricately designed by the government.

Another fantasy is that explicit guarantees have anything to do with ensuring credit flows to credit worthy borrowers. They are about ensuring credit flows to virtually anyone and everyone, at all times. In an unencumbered market, one that is not rigged by the government, credit-worthy borrowers don’t have to worry about getting credit.

The current market is nowhere close to a vibrant competitive market precisely because of how involved the government has been in the mortgage market. The administration’s proposal recognizes this heavy involvement, but falls short of a real solution because it expands the government’s role. According to the newly released document:

The proposal would remove the Federal charter from statute and fully privatize the GSEs. A Federal entity with secondary mortgage market experience would be charged with regulatory oversight of the fully privatized GSEs, have the authority to approve guarantors, and develop a regulatory environment that is conducive to developing competition amongst new private guarantors and the incumbent GSEs, ensuring they would all be adequately capitalized and competing on a level playing field.

Removing the federal charters from Fannie and Freddie is necessary but hardly sufficient for fixing the market. The federal government has tried – and failed – to fully privatize Fannie Mae before. Attaching an explicit federal guarantee to the companies’ securities makes it clear the companies will not really be privatized this time either.

The truth is that the U.S. does not need explicit guarantees to sustainably finance housing. But scores of special-interest constituents want federal guarantees to ensure their own profit streams.

Why not let every company in America issue securities with federal backing that kicks in during severe downturns? Why do members of the Mortgage Bankers of America get such high priority instead of, say, the National Retail Federation?

Most Americans are employed in the service industry, so why not let every service-oriented company issue fully backed securities?

What should be obvious is that allowing such a scheme would produce an over-abundance of leverage and investment, distorting prices throughout the economy, needlessly exposing taxpayers to billions in possible losses. All for no real reason other than to satisfy and protect well-heeled special interests.

Creating a new government insurance agency to cover defaults on these securities (and putting everything on budget) does nothing to change this dynamic. And, judging by the GSEs’ past, the consequences would be even worse.

As with any private-public partnership, the government is the dominant player and the company really is not private. Just ask Fannie and Freddie’s original shareholders how secure their property rights were during the 2008 crisis.

In any such combination, private property rights will always be subordinate to whatever public purpose those in power believe they’ve been vested with protecting and furthering.

Regardless, even fully privatizing both Fannie and Freddie, without first shrinking their footprint in the market, will not accomplish the stated goals of increasing competition and leveling the playing field because the two firms will remain the dominant players in the market. (To be fair, many details have not yet been explained, and the administration may have a plan to shrink the GSEs’ footprint.)

These two behemoths have set standards in the market for decades, and simply releasing them from conservatorship in anything like their current form will not create a competitive market. The fact that Fannie and Freddie are on the brink of finalizing a common securitization platform will only further standardize the market and tilt the playing field in one direction.

As Heritage’s Rachel Greszler remarked regarding the administration’s new reorganization plan, “Americans deserve a government more focused on its core constitutional mission and less entangled in serving special interests.”

It is very difficult to square explicit federal guarantees for MBS with the core constitutional mission of the U.S. government.