Did anybody say goodbye to Fannie and Freddie?
Maybe I did not dig down enough into Ricochet archives to see what has been written about it already here, and of course the Treasury/HUD announcement came out at the same time as President Mubarak was cashing in frequent flyer miles, but I think readers might want to pay attention to the fact that the Obama Administration has decided to bring down the curtain on the two big GSEs.
The report recommends using a combination of policy levers to wind down Fannie Mae and Freddie Mac, shrink the government’s footprint in housing finance, and help bring private capital back to the mortgage market. The Obama Administration is committed to proceeding with great care as we work toward the objective of ensuring that government support is withdrawn at a responsible pace that does not undermine the economic recovery.
The plan winds the two giants down 10% per year, shifting to a private market along with a renewed Federal Home Administration that makes the old kind of loan guarantees (10% down payments, smaller mortgage limits, etc.) Of course, they don't trust the private market too much, so there are these really vague options on some kind of not-really-guarantee/backstop that still has to be worked out. As economist Arnold Kling noted, the full report reads like a public policy grad student starred paper ... and appears to be just that.
There are two temptations I see, both to be avoided. First, that we should rejoice over the death of Fannie Mae and Freddie Mac. I'm seriously tempted to do that, but what replaces it? Canada exists without these institutions, but its mortgage market doesn't give you 30-year loans and if you prepay the mortgage there are substantial penalties. And they still have a government agency selling mortgage insurance if you put less than 20% down. Is that what you really want?
Neither does the Obama Administration, which is why they have this hybrid public-private vague institution in the report. Every time I hear private-public partnership in legislative discussions I see lots of smiles and nods. But if you could create a new mortgage agency and tell it to only by mortgage-backed-securities of below-median-income folks who are creditworthy and have enough down payment ... well, why couldn't you just tell Fannie and Freddie to do that? What makes the new institution better? Smiles and nods become dumb stares.
The report deserves a one-handed clap by the Congress that now receives it. It will be interesting to see if the new class of 2011 in the House takes the lessons of TARP to mean to wind up Fannie and Freddie and just leave the market to fill the void. And if that happens, what does the leadership do? Not that a laissez-faire solution would ever pass the Senate, but it might make a good moment by the House to show they learned that lesson ... if indeed that's the lesson to learn.
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Sep '10
Re: Did anybody say goodbye to Fannie and Freddie?
I have found the white paper but I will need a day or two to read it. I suspect that the congress (Barney Frank in particular) will want to beef up regulation of mortgage lenders to ensure that the market based lenders are held to a standard of chicanery that will fill the void left by Freddie and Fannie. He will not succeed.
Ding dong two big witches are dead (not fast enough for me}.
Feb '11
Re: Did anybody say goodbye to Fannie and Freddie?
Haven't read the report yet, so I don't know if this is really a twelve-step program to get us off our addiction to universal home ownership. Rent vs. buy is a simple economic decision--there is no reason to tilt the incentives. However, I'm suspecting that the report allows for social drinking, wine at dinner and beer at ball games, which means that we won't be really kicking the habit.
The American mortgage is one of the worst investments known to man. Its expected life extends when interest rates go up, and it prepays when rates go down. In many states, it's effectively a nonrecourse loan. But for the taxpayer guarantee, it's hard to imagine the 30-year mortgage developing on its own.
Freddie and Fannie are poster children for public private partnerships--the federal support was supposed to beguile private equity into bearing the risks. But the equity used to the support to take too much risk, so both the shareholders and the taxpayers bore the loss. It's a lose/lose proposition.
Oct '10
Re: Did anybody say goodbye to Fannie and Freddie?
Looks like triangulation to me.
Jul '10
Re: Did anybody say goodbye to Fannie and Freddie?
No reason? Perhaps in this age of wealthy bankrupt defaulters that's true.
But historically, if people are held accountable, there's a world of difference between urban renters & flyover owners.
Do you think that corporate VPs have the same skin in the game as do small business owners?
Aug '10
Re: Did anybody say goodbye to Fannie and Freddie?
As the keepers of the key got theirs, everybody else in the country took it in the shorts. Raines, Johnson, Gorelick.... The list is as long as the loot was big
Feb '11
Re: Did anybody say goodbye to Fannie and Freddie?
I don't dispute that home owners have a different economic relationship to their property than renters. But why should we distort the market to achieve 65% home ownership rather than 55%? The fixation on home ownership leads to a number of decisions that are (for some people) less than optimal--like delaying retirement savings for down payment and increasing home equity, too much leverage and over concentration of investments in real estate.
Jul '10
Re: Did anybody say goodbye to Fannie and Freddie?
ShellGamer
But why should we distort the market to achieve 65% home ownership rather than 55%?
You're right, we shouldn't. A big part of the problem is "ownership" sans consequence.
All I'm saying is that in our haste to remove distortions to correct markets, we shouldn't blow off the impact of ownership.
Jul '10
Re: Did anybody say goodbye to Fannie and Freddie?
As the horse gallops over the horizon it's nice to see the barn doors closing. But why no jail time for Bawny Fwank and Chris Dodd?
Dec '10
Re: Did anybody say goodbye to Fannie and Freddie?
Good riddance to F&F. If we learn nothing else from the worst nationwide real estate market decline since the Great Depression we should learn that government should not use the real estate market to perform social engineering experiments and it should not be in the mortgage business.
If the US manages to survive its experiment with big government without descending into second or third world status it should learn that politicians and government bureaucrats should not be permitted to manipulate and centrally plan large segments of the economy. Not only do they not know better than the markets and private investors, when they do these things they are not personally and directly risking anything and they are not personally held accountable for their mistakes.
May '10
Re: Did anybody say goodbye to Fannie and Freddie?
King,
We have $hundreds of billions down a political (F&F) rat infested hole (with more to come) and you are not sure whether it will be replaced by something worse? The country can survive without 30 year mortgages. It is almost unique to have fixed interest mortgages in the first place. Whether fixed term survives at all will depend on how we handle the broader debt problem. If we can put a mortgaged backed security back into into its historical spot at the most solid investment after (US) sovereign debt that is probably a good thing.
May '10
Re: Did anybody say goodbye to Fannie and Freddie?
apologies, had a small glitch. I wholeheartedly agree with all the rest - although a one handed clap is a stretch on the positive side.
Re: Did anybody say goodbye to Fannie and Freddie?
Steve MacDonald: King,
We have $hundreds of billions down a political (F&F) rat infested hole (with more to come) and you are not sure whether it will be replaced by something worse? The country can survive without 30 year mortgages. It is almost unique to have fixed interest mortgages in the first place. Whether fixed term survives at all will depend on how we handle the broader debt problem.
Well, it certainly can survive without the 30s. And it could go back to recourse loans, 20% down and five-year balloons. My point there was whether anyone thinks the political system would allow that.
Ricochet readers will learn I tend to be a bit polite, thus the one hand clapping. I'll remove the hand if they make some utterly unworkable public-private agency. And like you, I suspect they will. Forgive me for hope without reason...
May '10
Re: Did anybody say goodbye to Fannie and Freddie?
my initial reaction is that the political system does not have it in it'd DNA to allow the changes required to bring this situation to some semblance of sustainable. But then, what choice do they have? The current situation is a ruinous mess and there aren't a lot of options.
If Europe is the model, healthy down payments and 5 year balloons is the norm.
May '10
Re: Did anybody say goodbye to Fannie and Freddie?
I'm don't see why either MBS or 30 year loans are the problem. I would bet that most of the issues were with loans that had less than 10% down or re-mortgages/2nds where people sucked all their equity out of the property. Tighter underwriting and less Community Redevelopment nonsense ought to take care of the problem.
Those criteria assume that Fannie and Freddie are privatized to operate as real businesses, not retirement/out-of-office parking places for political types.
Re: Did anybody say goodbye to Fannie and Freddie?
Thanks for this great post, King! I'm already smarter.
And I know I'm smarter because now I'm more worried -- worried about what replaces Fannie/Freddie. My guess: a new regulatory agency that issues "targets" for mortgage issuers for subprime borrowers, probably especially those that are racially or ethnically categorized. Or, worse: the public/private institution that taxes financial institutions and uses the money to lend to the very same class of borrower.
Which solution should we be hoping for? It's too much, as you put it, to expect a free-market solution, but what do you think the closest, most feasible, most free-market solution is?