What to Do with Fannie and Freddie?

The buzz yesterday came from the Washington Post’s article about plans for Fannie and Freddie that the Obama administration is kicking around.

Briefly, the thinking seems to be that you set up a good bank/bad bank structure, let the government work out the bad bank loans over time and spin off the good bank in some sort of new mortgage finance structure. The devil, as they say, is in the details. Particularly, whether the new entity is public, private or some combination of the two.

There probably won’t be much argument that we need to dispose of the corpses of Fannie (FNM) and Freddie (FRE) sooner rather than later. The government has pledged up to $400 billion in aid to both and has so far pumped in $85 billion. I doubt that anyone has a good handle on exactly what it’s going to cost to unravel all of their bad loans, but it has to be done, so we might as well get on with it and take our lumps.

The real point of contention is what you put in their place. The old model, privately owned but implicitly supported by the federal government, didn’t work too well. It enabled management to richly reward itself while assuming enormous risks pinioned on a minuscule equity base. There was never any margin for error as we found out to our everlasting sorrow.

Nevertheless, it is going to be hard for the Congress to resist going back to something like the old model with its steady stream of cash available for lobbying and campaign donations as well as a willingness to roll out loan programs designed to appease political interest groups. A truly private company would undoubtedly engage in lobbying and donations but would be more immune to political interference, while a government agency solution would solve the lobbying issue but would be bound to be terribly politicized.

It would be nice to think that any final solution would enjoy a rigorous debate and rethinking about the degree to which we want to stimulate and subsidize homeownership, but I think that there is scant chance we would see that. All indications are that there is little appetite for scaling back the degree to which the government supports the housing industry and, of course, between the homebuilders and real estate lobbies, the pressure is tremendous to maintain the status quo.

This really is a pretty important discussion and decision. It’s going to have ramifications for housing — a big piece of the economy — for decades. Based on recent events I think that further government involvement rather than less is probably going to be the outcome.

I hope, however, for a different one.

Comments

[dilton:]

Government sponsored enterprises. Aren't they just super. Let's have the govt. create some more.

Aug 07 02:15 PM

[Tom Lindmark:]

Actually, no I don't feel like an idiot. I did notice that Freddie said they were still totally reliant on the Federal Government to stay afloat.


On Aug 07 05:22 PM Fre Freddie and Fannie wrote:

> Do you feel like an IDIOT now or what!!!
>
> Maybe we should put your wiriting in the same box and dig it down
> 10 feet as well.
>
> Here is another writer without a finanical degree pretending to know
> something.
>
> Freddie made money

Aug 07 06:50 PM

[Bruce Vande...:]

It is a pity slobs like Fre-Freddie exist. Seems they can't come up with anything rational so they degenerate into a name calling diatribe.

Good Article!

Aug 07 09:00 PM

[Tom Lindmark:]

It's humorous but like the zoo, you don't want to feed the animals. I made the mistake of replying to him.


On Aug 07 09:00 PM Bruce Vanderveen wrote:

> It is a pity slobs like Fre-Freddie exist. Seems they can't come
> up with anything rational so they degenerate into a name calling
> diatribe.
>
> Good Article!

Aug 07 09:26 PM

[ifuwish2:]

tom u are dumb really,,freddie said that they would not need no more money,,so why dont you do research first,,man they get dumb people to write these articles,,,,,

Aug 08 08:20 AM

[An Investor:]

Tom, good article .....

ifuwish2 .... After reading your reply, I am convinced you found it next to the eviction notices in your local paper. Your English and composition give you away ... admit it, you are a 5th grade dropout.

Aug 08 11:33 AM

[ifuwish2:]

* An Investor:
i think you never went to school ,,if you think i got grade 5 then you must have grade 1,,and i bought fre at .38 and bought 30000 shares and it is at $1.28, so i guess im a smarter investor than you and i guess makes me smart for a 5th grader ..so im smiling

Aug 09 01:06 AM