Fannie Mae and Freddie Mac to really leave the stage?
Inquiring minds should consider the following.
Together Fannie Mae and Freddie Mac stand behind 70% of all new mortgages in the United States. Since the two were placed under conservatorship in 2008, U.S. taxpayers are the ultimate guarantors for the $5 trillion in debt issued or guaranteed by the two. The plan, according to the Obama Administration, is to eventually get rid of Fannie and Freddie altogether, in the hope/dream/crackpipe-induced fantasy that private sector banks will step up and assume this role.
That seems like quite a big ask, no?
The plan was first mooted by the Administration last year. Just yesterday Tim Geithner affirmed that they are still, indeed, working on it. Albeit slowly.
It’s hard to argue with their central premise:
Under our plan, private markets – subject to strong oversight and standards for consumer and investor protection – will be the primary source of mortgage credit and bear the burden for losses. Banks and other financial institutions will be required to hold more capital to withstand future recessions or significant declines in home prices, and adhere to more conservative underwriting standards that require homeowners to hold more equity in their homes [....] Our plan is also designed to eliminate unfair capital, oversight, and accounting advantages and promote a level playing field for all participants in the housing market.
Or with the gradual steps they’ve taken so far (raising guarantee fees, lowering the maximum size of qualifying mortgages to $625,500 for the most expensive markets). But how shall they migrate from smaller moves like this to getting rid of Fannie and Freddie altogether (while Republicans look on approvingly)? Really? How would this not bring the entire U.S. housing market to a screeching halt?
Would it not be better to start with first principles? Underpinning the Administration’s plan is a presumption that the government should not be as involved in the housing market as it currently is. This is open for debate. But notice how the Administation’s approach to housing differs from its approach to the Too Big to Fail Banks. As I’ve written previously we now have
a G20-sponsored list of 29 financial institutions ”whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity” and a bunch of untested measures that directly address neither the size, nor the complexity nor the systemic interconnectedness. On the contrary, this list of Systemically Important Financial Institutions (SiFis) seems to serve more as shorthand for “all the banks we’ll have to backstop, come what may.” So much so that some banks were actually disappointed to not be included on this list when it was published [in November]!
If we’re not happy with the government’s — and taxpayers’ — current role in the housing market then we need realistic solutions to address this issue. Or conversely, acknowledge that there are good reasons for why things are the way they are and work to codify the current paradigm. We are in the brave new world of state-sponsored capitalism. Surprise, surprise: there are dilemmas that go along with this. It would be nice if the powers that be were upfront about this for a change.
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Image credit: ahisgett on Flickr
Category: Housing
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