Saturday, August 17, 2013

Why Are We Rushing To Get Rid Of Fannie Mae and Freddie Mac?

"How many Virginians does it take to change a light bulb?
Five: One to change the bulb and four to talk about how great the old bulb was."

I think I am turning into my late father, a conservative in the old traditional way of defending existing institutions and practices.  Here I go, about to defend Fannie Mae and Freddie Mac, whom all Very Serious People know should go as soon as possible.  President Obama thinks they should go, and we have two bills in Congress that will lead to that outcome, one in the Senate co-sponsored by Dem Sen. Warner of VA (my state) and Rep Sen. Corker of TN, both VSPs in good standing, while in the House Banking Chair Hensarling (R-TX) also has such a bill.  I mean wow, we have both the president and VSPs from both parties in Congress on this.  It must be great.  I mean, we all know that they were responsible for all the problems in the housing market that led to you know what!

Well, except maybe not.  Buried in the Saturday Real Estate section of the Washington Post today we have Kenneth Harley raising some questions.  Yes, indeed, both of these entities are most certainly open to serious criticism.  To varying degrees they have had histories of mismanagement and even corruption.  They were buying lots of subprime mortgages at the peak of the housing bubble.  Republican critics even claim that they were prime instruments in getting the whole bubble going because they supposedly pressured banks to lend to inappropriate poor minority home buyers under pressure from Clinton, although most observers do not buy this case.  Furthermore, they essentially went belly up with the bust and needed to be bailed out by a government takeover.  The case looks pretty strong for at least reforming them, if not outright getting rid of them.

However, Harley notes that they are now making money and paying off their loans.  Furthermore, not only have they been funding many housing market deals during these recent years of a desperately weak housing market, they were the only entity in the US that was doing so at the pit of the crash (a point Harley does not make).  Indeed, Harley reports that "Economists at Moody's Analytics estimate that dumping the companies and switching to a plan advocated by Sens. Bob Corker (R-Tenn) and Mark Warner (D-VA) 'would increase the interest rate for the average mortgage borrower' by one-half to three-quarters of a percentage point."  And, it should be noted that in contrast to the Hensarling plan in the House, the Corker-Warner plan actually does propose putting in place a housing market equivalent of the FDIC to provide insurance for housing lenders in the absence of the evil Fannie and Freddie.  Presumably the rates would go higher under the no-backdrop-at-all-plan of Hensarling.

In short, Harley accurately notes that not only is there no agreement on what should replace Fannie and Freddie, the available evidence suggests that the more reasonable of the serious alternatives out there is more likely to hurt the housing market than help it, at least in the short run.  They may be bums, but it is not at all clear that any available alternative will not be worse, quite possibly a whole lot worse.

Indeed, not only were they the only entities around doing any lending whatsoever in the housing market after the crash, but they only got dragged into financing subprimes late in the bubble due to the pressure from the fact that they were technically private entities supposedly out to make money, and they were not making as much money as the other lenders who had been playing the subprime racket for years before they got into it in 2005.  If they had been fully state-owned entities with the goal of stabilizing the housing market, they might well have stayed out of that entirely.

Which leads me to a bottom line that will not go over well with most opinion makers in Washington, probably not even Kenneth Harley, but which looks obvious to me.  Rather then eliminating them or returning them to their semi-private status where they are supposed to make money, increase the degree of state ownership and mandate them to play the roles that they were set up to play in the beginning (and Fannie goes all the way back to the New Deal), to act as backdrops and stabilizers of the US housing market.  Obama has said he wants to preserve the 30-year mortgage, but Harley hints that this may not happen with any of the currently proposed alternatives.  It is indeed the case that most nations lack such mortgages.  It was Fannie Mae that allowed the creation of them.  So, return Fannie and Freddie to their original functions and increase their backing from the state rather than reducing it.  Heck, their positive profits (at least for now) can even help further lower the budget deficit that most Americans do not even know is declining.

Barkley Rosser

2 comments:

Chris Heinz said...

This is a privatization issue, which always === a fat cat buddy of mine can extract $10Ms from it if given a chance. Of course, without adding value. So, Free Enterprise, Full Steam Ahead!!!

Unknown said...

During my brief stint in real estate sales in the 1980s, Fannie and Freddie not only guaranteed the loans, but set standards for insuring the loan in the first place. Not only did they set standards for the loans, they set standards for the houses being purchased. Inspections ensured that any major defects were brought to light, which in most cases had to be repaired before they signed off on the loan. The Fannie and Freddie of the 1980s and earlier would have at least mitigated the crash in 2007-08 I believe, if not prevented it.

Doing away with them is just giving the finance sector that much more power and will not serve American people well. Please tell me which of the items on Reagan's wish list has Obama not fill yet? I'd like to know what I voted for.