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With the news that there are signs of improvement in the housing market come plans to alter Fannie Mae and Freddie Mac, government-sponsored mortgage behemoths that have been under government conservatorship since the housing collapse.
Rather than alter them, the federal government should end them.
Until their collapse and government rescue in 2008, Fannie and Freddie operated like private entities, but with the federal government guaranteeing their debt. This enabled Fannie and Freddie to buy mortgages from banks, guarantee the mortgages against default, and then resell pools of those guaranteed mortgages to investors.
Taxpayers already have sunk more than $140 billion into the two companies to keep them afloat, and last year the Congressional Budget Office submitted testimony to the House Committee on the Budget estimating the costs of Fannie and Freddie to current and future taxpayers will be $317 billion.
There are other costs, too. Democratic and Republican administrations alike have used Fannie and Freddie as tools of social engineering. The engineers built a house of cards.
In 1992, for instance, the government required that 30 percent of Fannie’s and Freddie’s mortgage purchases should be from loans to low-income households. The government raised that target to 40 percent four years later. Then from 2001 to 2007, the target was raised in steps to 55 percent.
The result was inevitable: “We have relaxed some of our underwriting criteria to obtain goals-qualifying mortgage loans and increased our investments in higher-risk mortgages that are more likely to serve the borrowers targeted by HUD’s goals and subgoals,” wrote Fannie in its 10-K financial report in May 2007.
And people wonder why there was a housing bubble? They blame lenders for selling loans to persons with poor credit when the government actually mandated they do so.
In May, Morris A. Davis, an associate professor in the Department of Real Estate and Urban Land Economics at the University of Wisconsin-Madison, released “Questioning Homeownership as a Public Policy Goal.” The report noted:
“A mainstream estimate is that Fannie and Freddie have lowered mortgage interest rates by about 25 basis points (that is, 0.25 percentage points), and credible estimates are as small as 7 basis points.” Morris concluded, “Large macro trends have made the GSEs’ impact on mortgage rates look trivial.”
Nonetheless, the Wall Street Journal recently reported Jim Millstein, who oversaw the government’s recapitalization and sale of insurer American International Group, is circulating a plan to restructure Fannie and Freddie. He would have the companies sell their investment portfolios but continue to have them guarantee investors against default on mortgages the firms bundle into securities. He’d also recapitalize the firms by allowing them to keep their profits instead of sending them back to the Treasury Department as repayment for being bailed out.
But throughout the existence of Fannie and Freddie, we have seen Congress use them as favor factories to reward certain constituencies and high-powered lobbyists who repeatedly worked to block measures to impose stricter capital and reporting standards, standards that were designed to protect taxpayers, investors, and borrowers.
As long as Fannie and Freddie exist, the temptation and rewards for Congress to meddle at the expense of everyone else will remain.
Instead of looking for ways to keep Fannie and Freddie around, the government should be looking for ways to let them go.