A New Twist in the Saga of Fannie and Freddie
It’s hard to imagine now, but it wasn’t all that long ago when it could be hard to find average folks who knew or cared that much about Fannie Mae and Freddie Mac, the oddly-named, government-sponsored entitites that own or guarantee about half the nation’s mortgages. The obscure workings of the secondary market weren’t exactly fodder for everyday conversation. And as long as the housing market was humming along, what difference did some little known quasi-government agencies make in most people’s lives?
All that changed when the financial crisis hit, subprime mortgages tanked, and the government had to step in and bail out Fannie and Freddie last fall. Since then, the government’s efforts to prop up the two agencies has quietly become one of the biggest and most expensive bailouts, with the taxpayer tab expected to exceed $100 billion, CNN Money says.
And now comes the news the government wants to take another run at fixing Fannie and Freddie — by taking toxic mortgages off its books and placing them in a “bad bank” instead, The Washington Post reports.
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.
All this is quite a big deal, The Post explains:
The moves would represent one of the most dramatic reorderings of the badly shattered housing finance system since District-based Fannie Mae was created by Congress to support mortgage lending during the Great Depression. Both Fannie Mae and Freddie Mac, based in McLean, have government charters to buy home loans from banks, which they then repackage and sell to investors. The banks can then use the proceeds to offer more loans to home buyers.
At Clusterstock, however, Joe Weisenthal isn’t impressed, saying this move will only leave Fannie and Freddie open to creating havoc in the housing market once again.
This is a terrible idea.
It’s not that it’s a bailout, as these schemes typically are. That ship is already sailed. We already know we’re going to guarantee every last dollar of their debt.
No, the problem is that we’ll be creating two new, reinvigorated GSE, with AAA balance sheets and government guarantees to match. This means they’ll be able to create havoc in the housing market all over again. Maybe they’ll start modestly, with strict guidelines or whatnot — but then, since so much of the turnaround plan revolves around bad lending practices (document-light lending, high LTV ratios, etc.) they very well may go straight back to their old ways. Certainly, the political pressure will be on them to prop up as much of the market as they can handle.
We’ve already bailed them out. Is it too much to ask that they slink quietly off into the night?
Treasury Department officials told The Post that any proposals are still in the early stages. The basic idea would be to use the “bad bank” for toxic assets, and then create new companies or agencies – the “good banks” – to attract private investment to support mortgage lending.
Redoing Fannie and Freddie doesn’t seem to be in question; it’s the details that are under debate. Overhauling the two agencies will be huge, and one of the biggest challenges to come out of the housing crisis. So much for obscurity. A very public fight to remake the futures of Fannie and Freddie is on.