Fannie and Freddie, Again?

Fool me once, shame on you. Fool me twice, shame on you.

A critical ingredient – indeed, the key ingredient – in the creation of the housing mess that led to the current economic mess was politicians pushing so-called “affordable housing” policies. Quite simply, home ownership detached from economic reality due to governmental policies led to a housing meltdown, and then to more misguided government bailouts, government “stimulus” efforts, and so on.

Two of the big problems were the quasi-government entities known as Fannie Mae and Freddie Mac. An August 6 Washington Post story neatly summed matters up this way:

Fannie Mae and Freddie Mac existed for years as odd hybrids, created by government to support housing but owned by private shareholders. (They are now majority-owned by the government.) Over the years, the unusual status has fed concerns that the firms exploited their quasi-governmental role to borrow money at very low rates and therefore grow far larger than was sustainable. At the same time, they had a duty to shareholders to maximize profits, leading them to take on bigger risks.

What is the government doing with them now? As the Post noted:

Until the future of the firms is worked out, the Obama administration has been using them to carry out its housing recovery program, including restructuring mortgages to avoid foreclosures. In addition, the Federal Reserve has bought well over $1 trillion worth of mortgage-related securities and debt from Fannie Mae and Freddie Mac. That further helped to lower interest rates on home loans. The government also has pledged up to $400 billion in direct investments in the firms.

And what about the future of these entities? The Post reported:

The Obama administration is considering an overhaul of Fannie Mae and Freddie Mac that would strip the mortgage finance giants of hundreds of billions of dollars in troubled loans and create a new structure to support the home-loan market, government officials said. The bad debts the firms own would be placed in new government-backed financial institutions -- so-called bad banks -- that would take responsibility for collecting as much of the outstanding balance as possible. What would be left would be two healthy financial companies with a clean slate.

So, the taxpayers would get stuck with the bill, while Fannie and Freddie get a clean slate to start this all over again? That’s not change. That’s not reform. That’s just doing the same thing over and over again, but expecting different results.

There’s only one answer that makes sense – stop the subsidies, and leave mortgages to the private marketplace and sound economics.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council