What To Do With Fannie and Freddie
Washington is quiet, but that does not mean it is dormant. Staffers on the Hill and in the Treasury Department are working on a plan to restore normalcy to the mortgage market and to fix Fannie Mae and Freddie Mac, the government-sponsored enterprises that buy up mortgages from lending banks, providing liquidity to the housing market.
The New York Times has a series of op-eds on the subject, and taken together, they are a good primer on the intractable problems facing legislators. Take this argument from the former president of the St. Louis Federal Reserve Bank, William Poole, advocating for total phase out of Fannie and Freddie:
If the home finance market were fully private, then it would bear the losses from its own mistakes in pricing and insurance. The proper government role is regulatory oversight and not direct operation of financial firms. Fannie and Freddie could not be shuttered immediately; they are too large. A sensible transition plan would have them stop buying new mortgages, and their portfolios would decline as the mortgages they own are paid down. Within 10 years, the portfolios would shrink to insignificance. Their securitization business, whereby they purchase mortgages and issue securities against them, should likewise be wound down. A practical approach would be to set a gradually rising schedule of fees, motivating private companies to enter the securitization business. In 10 or 15 years, the companies would be gone, closing a chapter in American financial history that enjoyed considerable success but ended very badly and at great taxpayer cost.
The problem is, were the government — via Fannie, Freddie and the Federal Housing Administration — to stop buying mortgages, it would crater the housing market. The government currently backs 19 in 20 new mortgages. A decade seems far too short a time frame for pulling out, given how weak housing is.