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Senate punts on Fannie and Freddie

I was sympathetic to John McCain's plan to eliminate Fannie Mae and Freddie Mac, but Annie Lowrey made a pretty compelling case that it was a terrible idea. But it was a terrible idea for a weird reason: It got rid of a bad idea too fast.

Fannie Mae and Freddie Mac are what happens when ideological compromise goes horribly wrong. On the one hand, they're supposed to make housing more affordable. On the other hand, they're private companies, because you wouldn't want some sclerotic government agency at the center of this. The result? Profit-maximizing corporations that enjoy the government's backing. That means the debt markets treat them as almost riskless, as the government will clean up their messes, and so Fannie and Freddie can borrow money cheap. But then they take a bunch of risks in order to juice shareholder returns. It's everything you don't like about the private sector combined with everything you don't like about the public sector.

The problem, however, is that the housing market depends on them. In the first three months of the year, Fannie and Freddie backed up 97 out of 100 mortgages. You remove them -- or even suggest to the market that you may remove them in the future -- and the housing sector will nosedive. Faced with this, the Senate punted: They rejected John McCain's plan but approved an amendment from Chris Dodd directing the Treasury Department to study the issue and figure something out.

But what are they expecting Treasury to do, exactly? It's not that we can't reform Fannie and Freddie. It's that the Senate can't vote for any serious reform of Fannie and Freddie, any more than it could vote for an end to the mortgage interest tax deduction.

By Ezra Klein  |  May 12, 2010; 11:17 AM ET
 
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Comments

What? They punted while staring another housing bubble right in the face? 97 out of 100 mortagages are backed by a semi-private, huge, "too big to fail" corporation which has an infinite credit line to taxpayer money!!! They should really focus on immigration and cap and trade while the economy goes down in flames. What the he!! is going on. FinReg with no Fannie and Freddie reg? Crazy.


If 85% of people are happy with thier mortgage than why wouldn't this be something the dems would take on?

Posted by: Holla26 | May 12, 2010 11:44 AM | Report abuse

Fannie and Freddie weren't privatized for ideological reasons; it was to make the deficit looked better. Pretty sure it was LBJ who did the dead.

The right answer is to re-nationalize Fannie and Freddie. It's basically impossible for the long-term mortgage market to exist at rates we want it to exist at w/o the support of some govt institution.

Posted by: NicholasBeaudrot | May 12, 2010 11:48 AM | Report abuse

This post makes me wish I had a bit of a primer on the housing market and the way everything works. I'm still in college and since I'm not an econ major I'm not particularly well versed in how the the housing market actually functions. Could somebody suggest some basic reading I could do to get a better handle on the ins and outs of the housing market?

Posted by: Owen_Truesdell | May 12, 2010 11:55 AM | Report abuse

Nicholas,


how about it exists at "realistic" rates or even God forbid market based rates? Or should taxpayers continue to subsidize homeownership?

http://money.cnn.com/2010/05/12/news/economy/taxpayer_mortgages/index.htm

Posted by: visionbrkr | May 12, 2010 12:19 PM | Report abuse

Wouldn't it be better to pull the plug when the housing market is already at its nadir rather than wait for another bubble to inflate?

Right now we're only building 600k homes/yr and residential investment is a small proportion of GDP. We can take away supports when the housing market has a long way to fall and a lot of economic activity depends on the housing market, or we can take away supports now when far less ancillary economic activity depends on the housing market. There will never be a 'right time' to kill the GSEs. Once housing recovers, all of the talking heads will talk about how much damage a correction in housing will do to the banks and economy!

Subsidies to housing aren't free. Additional credit going to the mortgage market means less credit avaiable elsewhere, raising interest rates in other markets, not to mention the taxpayer has been throwing billions at the GSEs to offset losses.

In any case, if we're not going to get rid of the GSEs, can we PLEASE get the downpayment up from 3.5% to at least 10% or 15%?

Posted by: justin84 | May 12, 2010 3:33 PM | Report abuse

Fannie and Freddie took risks because Congress told them to do so, significantly loosening their underwriting requirements.

Posted by: tomtildrum | May 12, 2010 4:36 PM | Report abuse

Here's an excerpt from Sunday's NY Times talking about the real scandal with Fannie and Freddie...

Ignoring the Elephant in the Bailout
By GRETCHEN MORGENSON:

On the one hand, the companies are charged with supporting the mortgage market by buying loans from banks and other lenders. At the same time, they must work to minimize credit losses to make sure the billions that taxpayers have poured into the firms don’t disappear.

Mr. [Dean]Baker’s concern that Freddie may be racking up losses by overpaying for mortgages derives from his suspicion that the government might be encouraging it to do so as a way to bolster the operations of mortgage lenders.

That would make Fannie’s and Freddie’s mortgage-buying yet another backdoor bailout of the nation’s banks, Mr. Baker said, and could explain the government’s reluctance to include them in the reform efforts now being so hotly debated in Washington.

“If they are deliberately paying too much for mortgages to support the banks,” Mr. Baker said, “the government wants them to be in a position to keep doing that, and that would mean not doing anything about their status until further down the road.”

It’s no surprise that the government doesn’t want to acknowledge the soaring taxpayer costs associated with these mortgage zombies. The truth about Fannie and Freddie has always been hard to come by in Washington, and huge piles of money seem to circulate silently around both firms.

Posted by: goadri | May 12, 2010 4:49 PM | Report abuse

Goadri makes a key point. The very same politicians who villify Fannie and Freddie are also supporters of the big financial institutions that are dumping toxic assets on these institutions.

In this sense, Fannie and Freddie are just one more channel for privatized profits and socialized losses.

Perhaps if Fannie and Freddie had more control over the quality of the assets they take on, they wouldn't be such black holes.

Posted by: jimol | May 12, 2010 7:07 PM | Report abuse

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