In 1968, President Johnson “privatized” Fannie Mae to finance the “guns and butter” fiscal policy that floated the Viet Nam War. Now, Congress is funding the payroll-tax and unemployment-benefits provisions in the year-end bill in part through a whopping new charge the GSEs are to squeeze from lenders. As is all too often the case when fiscal policy dictates otherwise-unrelated decisions, the dollars raised are dwarfed by the cost of the unintended, ill-thought-through result. Instead of right-sizing the government’s role in mortgage finance, this new tax will inflate taxpayer risk – not at Fannie and Freddie, but rather at the FHA.

This may seem alarmist, as FHA fans have touted its turn-around. The happy talk is sparked in part by another flight of fiscal fancy: allowing the FHA loan-limit to stay at the “emergency” $729,750 level even as Congress pared the GSEs’ loan limits down in the “minibus” appropriations passed just a few weeks ago. With this edge over Fannie and Freddie, the FHA is taking on marketshare – not exactly “privatizing” mortgage finance.

Past campaigns for FHA marketshare do not bode well. From 2005 to 2008, the FHA lowered its underwriting standards to fight off challenges not just from the GSEs, but also from the run-amok private MBS market. FHA thus booked truly awful loans, growing itself largely by insuring mortgages even speculative subprime lenders knew better than to touch. Now, its last actuarial report tells the tale. As we calculate it, FHFA’s single-family insurance program is leveraged at 846:1 – the relevant fund has a 0.12 percent capital base as a bulwark against taxpayer risk. And, as FHA balloons, its top officers have qualms that its still-nascent risk controls can keep up.

But, not to worry, we’ll be giving FHA even more business if Congress finances its latest spending package by wringing still more out of Fannie and Freddie. The idea in the payroll-tax bill is to add a new “guarantee fee” atop the existing g-fee the GSEs charge to lenders when Fannie or Freddie purchase a mortgage. GSE fees are already uneconomic. As the FRB has noted, they are a major reason many borrowers can’t refinance unaffordable mortgages into lower-rate ones. Throwing this still higher fee atop the old ones will, thus, throttle the GSEs.

All this may seem gratifying to GSE opponents, but it isn’t exactly the road to the privatization most espouse. Choking Fannie and Freddie just to gorge FHA means only that the ability of private capital to come back to residential finance is not just delayed, but also doomed. With Fannie and Freddie in the game, private capital has at least a foothold pending meaningful reform. If FHA takes it all, private capital can never come back because GSE reform will come too late. No private insurer or securitizer can compete with FHA and Ginnie Mae and the full-faith-and-credit seal they carry. Thus, private capital will go elsewhere in the financial market, leaving taxpayers holding the entire bag for all of U.S. residential-mortgage finance.

Now, that’s saving money.