Do We Want the Government Backing Fannie and Freddie Forever?

Is this a good idea?

From Reuters:

The U.S. Mortgage Bankers Association said on Wednesday it will ask Congress to transform mortgage lenders Fannie Mae, Freddie Mac into several smaller, privately held companies that would issue mortgage securities with a government guarantee.

The proposed framework from the industry group would give successor entities to Fannie Mae and Freddie Mac the authority to create securities backed by certain types of mortgage.

The new companies would guarantee the securities against defaults on underlying mortgages and pay fees into a federal insurance fund that would make good on interest and principal payments to bondholders if the companies were unable to make them.

“The government has an important, limited role to play to ensure a stable flow of funds for mortgages.” said Michael Berman, MBA’s vice chairman and chairman of the Council on Ensuring Mortgage Liquidity.

The MBA plan calls for government agencies, rather than the new companies, to assume the “mission” of promoting affordable housing that Congress has long assigned to Fannie and Freddie.

It makes me uncomfortable but perhaps I’m over reacting. Certainly it places the federal government in the position of subsidizing housing for the foreseeable future. That doesn’t sound like a particularly good idea — once again picking winners and losers - but at the same time shelter is a pretty basic need and it’s hard to argue against government assistance for that sector.

The problem is that you can start making all sorts of arguments for other basic goods, food and transportation for example, and then you end up, well you know where.

Someone in Washington needs to come up with a long-term plan for the mortgage market. Currently the market is nothing more than an extension of the Fed and Treasury. Absent any plan this risks becoming the status quo. The longer we wait, the harder it’s going to be to institute any real reforms.

Comments

[LKofEnglish:]

You been buying the stock of late?

Sep 02 04:34 PM

[Socialism c...:]

"Someone in Washington needs to come up with a long-term plan for the mortgage market."

NO!!! Washington involvement in mortgage markets is WHAT CAUSED THIS MESS!!! Kill F&F and get D.C. the H#LL OUT!!!

Sep 02 05:51 PM

[Alan Young:]

From my reading of your excerpt, it seems that the mortgage lenders would finance the insurance pool, making it no different from the FDIC in function. So, yes, I'd say you are overreacting.

Of course there were plenty of people who thought the FDIC was a Socialist plot when it got started, too. I wonder how many people still think that, and whether they all self-insure their bank accounts?

Sep 02 08:22 PM

[Mark54:]

There need to be 2 general types of MBS.... (1) the explicitly 100% govt backed and (2) private market self insured. I am fed up with the quasi-govt backed MBS. There is no place for a private company with govt support.

Sep 02 09:34 PM

[Moon Kil Woong:]

The banks use Freddie Mac and Fannie Mae to stick the government and ultimately the taxpayers with the bill for bad mortgages written at interest rates which are too low. We are not holding up the economy this way, merely subsidizing the banks with profit without taking the requisite risk involved for that profit.

Freddie Mac and Fannie Mae are not just too big to fail and a systemic risk. They have warped our home mortgage market beyond any semblance of a rational free market. As they gobble up all the rest of this market because no one can compete with them, this market seems to be the first on the list for complete socialization. A bit worrisome since it represents 90% of middle class wealth.

We need to completely abolish these and commit to no more continuous government subsidization in the free market.

Sep 02 10:04 PM

[Joe Shareho...:]

Fed and treasury can't boost it forever. Sooner or later the stack of cards falls......

Sep 02 11:56 PM

[Tom Lindmark:]

I thought of the FDIC angle when I wrote the post and I agree it has parallells. I tend not to be so concerned about the exposure to loss as I do think the proposal can insulate the taxpayer if adhered to as I am the concept of further subsidizing housing. As it is, it receives the largest federal subsidy of all, the tax deductability of mortgage interest.

We've probably relied too much on housing as a driver of the economy for well nigh on 40 years and perhaps it's time to let it stand a bit more on its own two feet and see if investment gets channeled into other sectors.


On Sep 02 08:22 PM Alan Young wrote:

> From my reading of your excerpt, it seems that the mortgage lenders
> would finance the insurance pool, making it no different from the
> FDIC in function. So, yes, I'd say you are overreacting.
>
> Of course there were plenty of people who thought the FDIC was a
> Socialist plot when it got started, too. I wonder how many people
> still think that, and whether they all self-insure their bank accounts?

Sep 03 12:05 AM

[temeratemod...:]

Are you aware that it was the unregulated private lenders and issuers (including many of the unregulated wall street dealers) who created the subprime collapse ? Fannie & Freddie losses followed after bad business conducted after 2004. As a separate matter the entire group of private and GSE institutions never saw the real estate bubble and kept feeding it with debt financing. Both private and public mssed it. Look up the volumes and timing of what happened. Even the right wing so called free market think tanks have moved to platitudes & generalizations about govt causing all this because the evidence isn't there. Ironically, there's a strong argument that a LACK of regulation may have prevented the RE bubble and hidden leverage from unregulated deriviatives that are the roots of the mess. I suspect ideology that assumes govt is the root of all our problems and desire to think simplisticly black& white
prevents govt haters from exploring a more complex reality.

On Sep 02 05:51 PM Socialism cannot compete! wrote:

> "Someone in Washington needs to come up with a long-term plan for
> the mortgage market."
>
> NO!!! Washington involvement in mortgage markets is WHAT CAUSED THIS
> MESS!!! Kill F&F and get D.C. the H#LL OUT!!!

Sep 03 10:32 AM

[Forever Bear:]

This is essentially what the government has been doing ever since the government bailed out AIG.
The investors who have been financing our American dream, have decided to put their money elsewhere because it is just too easy for homeowners to not make their monthly payments that they have promised to do so.
There are people who cannot afford to buy a house will buy it anyway. And when things turn ugly, they just walk away from their obligation. The main culprits were the loose lending standard and home owners don't have enough skin in the game.
I'd say they should make it mandatory to make a 40-50% down payment to buy a house (so they have to think twice before they walk away) and reduce the tax benefits (people's excuse to buy McMansions).

Sep 04 12:58 PM