A Pink Slip For Fannie Mae and Freddie Mac? The Free Market Is Better Equipped To Set Housing Prices And Mortgage Rates


The Washington Times
By: Michael Taube
August 7, 2013

President Obama floated a plan Tuesday that he hopes will take some of the load off Fannie Mae and Freddie Mac in the financing of American homeownership. Some members of Congress have a better idea: Bid farewell to the housing corporations' altogether. The House-sponsored Protecting American Taxpayers and Homeowners Act would, if passed, put America's two failed mortgage giants out to pasture.

Though far from certain, this would be a superb decision. While there would be some short-term pain when Fannie and Freddie are brought down, it would ultimately lead to a long-term gain for the free-market economy, business and consumers.

The 75-year-old Federal National Mortgage Association (Fannie) and 43-year-old Federal Home Loan Mortgage Corporation Enhanced Coverage (Freddie) are government-sponsored enterprises. They were both created by Congress to buy secondary mortgages, package them together, and sell them as mortgage-backed securities to potential investors. As noted by Barron's Jonathan R. Laing, they "own or guarantee repayment on more than half of the system's $10 trillion in outstanding mortgage debt."

"More astonishing, these agencies are making money again - lots of it under tightened government supervision and aided by strengthening home prices."

Yet there have always been questions and concerns about these agencies.

A 1996 Congressional Budget Office report mentioned that while "there have been no federal appropriations for cash payments or guarantee subsidies" for the two mortgage giants, the government provided "considerable unpriced benefits to the enterprises" and "government-sponsored enterprises are costly to the government and taxpayers." Notable opponents included Federal Reserve Chairmen Alan Greenspan and Ben S. Bernanke (who both favored tighter regulations) and economists Milton Friedman (who supported privatization) and Vernon L. Smith (who called them "implicitly taxpayer-backed agencies"). There have also been allegations of slush funds, accounting discrepancies and even kickbacks.

Washington's direct involvement has also been rather worrisome. Many prominent Republicans and Democrats have voiced their support for Fannie and Freddie over the years. Some have sat on their executive boards, while others have received significant campaign donations. When Newt Gingrich ran in the 2012 GOP presidential primaries, for example, his ties with Fannie and Freddie - and a reported $1.6 million in consulting fees from the latter - didn't help his cause.

Fannie and Freddie also played a significant role in the subprime mortgage crisis, which helped bring down the U.S. economy with a huge thud. They were bailed out to a tune of roughly $154 billion. This disgraceful, anti-capitalist strategy of sweeping away their debts, as the government did with the automotive industry, gave them a chance to restructure and rebuild. With the American taxpayers footing the entire bill, that is.

Fortunately, things are about to change. As Mr. Laing writes, "what is more probable than Fannie or Freddie's revival is the emergence of a hybrid American mortgage system in which the government has a lesser but continuing role as guarantor." Hence, the "private sector will play a bigger part, but will also have to assume more risk" and homeowners would potentially face mortgage rates of "a half percentage point or more than under the current system."

To be fair, there is a proposed bipartisan Senate bill on the table to eliminate the two agencies in five years. They would be replaced with the Federal Mortgage Insurance Corp., which would only insure 90 percent of a mortgage-backed security. The remaining 10 percent would be covered by, in Mr. Laing's words, "private-capital MBS issuers and insurers."

That's not the bill I think Congress should choose, however. The House bill, PATH, would be a much wiser strategy in dramatically shifting the playing field and Name

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This page contains a single entry by CFED published on August 7, 2013 4:47 PM.

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