Why is the federal government of the USA in the mortgage business? Some might argue that there is an inherent advantage in encouraging home-ownership. And that perhaps there might be a few people who need just a little help getting started, people for whom private mortgages appear to be unavailable. Even if you accept that, let's consider why they cannot get a private mortgage: bad credit, not enough income, criminal records all make it hard to get someone to lend you tens or hundreds of thousands of dollars. Why then should taxpayers be expected to lend these people money, and then politicians act shocked when they don't pay it back? You could argue about potential discrimination when other factors like the aforementioned are not relevant, but it seems to me that vigorous anti-discrimination regulation and enforcement of same would be a better role for government than setting up a public-cum-private bank like Fannie Mae.
And even if so far you still think Fannie may is a good idea, would you be as surprised as I was to find out that Fannie and Freddie, i.e. taxpayers, are holding the paper for 42% of mortgages in this country? Exposure measured in trillions of dollars, all set at the foot of taxpayers.
http://www.ajc.com/opinion/content/printedition/2008/08/31/fanfred.html
Fannie Mae and Freddie Mac, known as government-sponsored enterprises, have for decades played an important role in markets that bankroll American housing.http://www.ajc.com/opinion/content/printedition/2008/08/31/housinged.html
Fannie and Freddie, created to boost homeownership, own or guarantee at least 42 percent of the $12 trillion in U.S. residential-mortgage debt outstanding. They make money by buying home loans and mortgage securities, profiting on the difference between their borrowing cost and the yield on the debt.
They also guarantee and package loans as securities, charging a fee.
Fannie and Freddie have reported $14.9 billion in net losses for the past four quarters as loan delinquencies rose.
Fannie Mae Chief Executive Daniel Mudd announced a top management shake-up last week in a move to restore investor confidence.
Many investors and policy-makers are concerned that the companies do not have enough capital to withstand rising losses from homeowner defaults.
Last month, Congress authorized the Treasury Department to pump billions of dollars into the companies, if needed.
During the current housing crisis, Freddie and Fannie have been criticized for rewarding shareholders using private profits while relying on taxpayers to absorb losses.
Fannie Mae
In 1938, Fannie Mae was created during the presidency of Franklin D. Roosevelt. An inconsistent supply of mortgage financing at that time meant that millions of families could not buy homes, or were at risk of losing properties.
Congress “rechartered” Fannie in 1968 as a shareholder-owned company that funded its operations using private money from investors around the globe.
Freddie Mac
Chartered in 1970, Freddie Mac plays a similar role to Fannie Mae, undergirding what’s called the secondary mortgage market.
Back in 2005, when the troubles of Fannie Mae and Freddie Mac weren’t yet commanding the front page so regularly, the government was already spending about $41 billion to subsidize housing directly.
More than triple that amount, or $147 billion, was foregone on indirect tax subsidies to homeowners. That chunk of change might have been used for any number of government projects: pounding percentages into fifth-graders’ heads, lowering the capital gains tax, declaring summer gas holidays. Phelps’ anti-house argument calls to mind the analysis of one of his Columbia colleagues, Michael Heller. Heller’s new book, “The Gridlock Economy,” posits that “too much ownership wrecks” the economy.
http://www.ajc.com/opinion/content/printedition/2008/08/31/fanned.html
As government-sponsored enterprises, Fannie and Freddie have long had one foot in the free market and the other firmly planted on Capitol Hill. To get their way through the years, both agencies have spent millions of dollars on campaign contributions, lobbyist fees and foundation grants unavailable to true government agencies. At the same time, the pair has been exempt from local and state taxes, giving them a financial advantage over truly private competitors. They also paid lower rates than their private competitors because investors assumed taxpayers would ultimately make good on their obligations, come what might.http://www.ajc.com/opinion/content/printedition/2008/08/31/fannbox.html
In return, of course, Fannie and Freddie have played a valuable role in mortgage markets, buying home loans, repackaging them and selling the end products to investors. Millions of Americans likely would not own their homes today without assistance from those two agencies.
Even so, government should ask if there’s a better, more efficient way to undergird the market and deliver the same impact. Most likely, there is.
In analyzing the matter, Congress should start with the belief that the time may have come, as the Cato Institute urges, to start dismantling Fannie and Freddie as we have come to know them. That step would allow the private sector to gradually assume their role of risk-taking in the marketplace. At the very least, numbers need to be crunched and a spirited public debate should begin over the spreadsheet results and what they portend for Fannie and Freddie’s future.
Among the advocates for phasing out Fan and Fred is William Poole, a Cato Fellow and, until earlier this year, president of the Federal Reserve Bank of St. Louis. In a New York Times op-ed piece recently, Poole argued that “Fannie Mae and Freddie Mac are not essential to the mortgage market; if they were put out of business in an orderly fashion over five to 10 years, the market would pick up the business they abandon.”
The Housing and Economic Recovery Act of 2008 will provide crucial support for the housing market and … also establishes a series of landmark reforms that will put U.S. housing and mortgage finance on solid footing for the long term. Chief among these is the establishment of a new regulatory framework for the federally chartered housing enterprises that are at the center of the mortgage market: Fannie Mae, Freddie Mac and the Federal Home Loan Banks.”
—- Daniel H. Mudd, president and chief executive officer, Fannie Mae
“Fannie and Freddie’s continued activity is central to the speed with which we emerge from this housing correction and remove the underlying financial-market and financial-institution uncertainty. The temporary liquidity and capital backstops included in this new [housing recovery] law are aimed at supporting the short- and longer-term stability of financial markets, not just these two enterprises.”
—- Treasury Secretary Henry Paulson, in a July 31 speech
“Congress and the president are congratulating themselves for bailing out Fannie and Freddie and imposing more regulatory control, with the excuse that they pose a threat to financial market stability. A better solution, however, is to make these and other government-sponsored enterprises play by the same rules as other businesses, and to end the distortions caused by federal subsidies.”
—- Daniel J. Mitchell, Senior Fellow, Cato Institute
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