Now that Fannie and Freddie are on right track, let them live
Could it get any worse for Fannie Mae and Freddie Mac? Last week, even President Barack Obama joined the growing chorus of those who want to put them out of business.
He did so in a speech in Phoenix, outlining — at long last — his ideas for reshaping the country’s housing-finance system. He called for the housing-finance market to be primarily driven by private capital, with a “limited” federal role. He said that the 30-year fixed-rate mortgage should remain a mainstay of the mortgage market. And he essentially endorsed a recent bipartisan Senate bill, a complex piece of legislation that calls for winding down Fannie and Freddie over five years.
- Let’s just call this what it is: capitulation. Ever since the financial crisis, Republicans have insisted that Fannie and Freddie — private companies that have a government role, and that guarantee and securitize mortgages — were the root problem. According to their theory, the two companies drove the country off the sub-prime cliff, primarily because of their federal mandate to help make it possible for low-income borrowers to own homes.
- The truth is pretty much the opposite. When the banks first jumped into subprime mortgages, Fannie and Freddie hung back. Only after they began losing significant market share did Fannie and Freddie decide, belatedly, to get into the game. Because they were so thinly capitalized, they had almost no cushion when the losses began to pile up.
And after the George W. Bush administration put Fannie and Freddie into conservatorship — propping them up with a $185 billion bailout — they had no defenders left. Republican demands that Fannie and Freddie be put out of their misery became the sine qua non for any discussion about reshaping housing finance.
There is no question that Fannie and Freddie were deeply problematic companies in their heyday. They bullied anyone — members of Congress included — who tried to rein them in. They had implicit government backing that they either played up or denied, depending on the circumstances. And in addition to their guarantee business, they owned a gigantic portfolio of mortgages that many feared would bring them down.
- But they also did something vital. When Fannie or Freddie guaranteed a mortgage, it meant that they were taking on the credit risk from the lender. That entailed two skills. The first was underwriting. Until they lost their heads in the subprime bubble, Fannie and Freddie had high underwriting standards that banks had to adhere to get a mortgage guaranteed. Second, they had to have a hedging operation that could maneuver adeptly as interest rates changed.
And that ability of Fannie and Freddie to take on credit risk is what made that staple of American housing finance — the 30-year fixed-rate mortgage — possible. So much can happen over the course of 30 years that no bank wants to take on that risk — and no system of private capital is going to continue making those loans, at least not without some kind of government backing.
Which is why all this talk of “winding down” Fannie and Freddie, as the president put it last week, makes so little sense. In conservatorship, the two companies have been doing exactly what the country needs from them: guaranteeing prime mortgages and propping up the housing market after private capital fled.
The Senate bill under consideration does backward somersaults to kill off Fannie and Freddie while retaining a government role in the mortgage market, including the creation of a new agency to serve as a backstop to the securitization market. It is incredibly complicated, untested and probably unnecessary.
- Their sole role now is to guarantee and securitize mortgages. And they are making huge amounts of money — much of which is going to the government. Fannie Mae, for instance, recently announced a quarterly profit of $10.1 billion, and said it was making a $10.2 billion payment to the Treasury. “At the current pace,” The Wall Street Journal reported, “over the next year, Fannie and Freddie are likely to repay the government more money than they borrowed.”
Does housing finance need reform? Yes. Do we need private capital to return? Of course. But the easiest and most sensible reforms would take advantage of what we already have — two companies that know how to handle credit risk — instead of trying something new and untested, purely because Fannie and Freddie are political poison.
In the meantime, we should be thanking Fannie and Freddie, instead of tearing them down.
Joe Nocera writes for The New York Times.
Most know that I am extremely fond of Joe Nocera’s thoughtful opinion pieces — he remains one of my favorite journalists with whom I almost always agree. His approach generally presses me to look at something that I had not taken any time to purview, ergo had been uninformed. And his stuff is just so wide-ranging and relevant!
Having read and thought this over, I am nonplussed that our president would agree to abandon this in-place winner of established worth – – who it seems, is apparently one of the few profit making arms that is working to our advantage. Why would any arbitrarily want to cut and burn this treasure who knows how to do everything, has done it and is glowingly successful. Would anyone, anywhere make an effort to show me how or when the “market” has concerned itself with the ordinary man [middle-class], and endeavored to contribute to the common good? Didn’t happen! The MARKET serves the corporate structure. Their profit is the name of their only game. As to housing or pride of ownership – wasn’t even a blip on the screen in our recent crisis. The needs of the needy and middle class were dumped so fast that heads swam as these big-shot lenders concerned themselves only with saving own butts and denying any responsibility at all.
Sorry Mr President, this is my line in the sand! Rethink this or tarnish yourself permanently with something that’ll never wash off. Jan)