Obama’s bid to end Fannie Mae, Freddie Mac is on the money

I spend plenty of time criticizing President Obama, so here’s one I think he may be getting right: Moving to wind down Fannie Mae and Freddie Mac. From the Associated Press:

The Obama administration wants to shrink the government’s role in the mortgage system — a proposal that would remake decades of federal policy aimed at getting Americans to buy homes and would probably make home loans more expensive across the board.

The Treasury Department rolled out a plan Friday to slowly dissolve Fannie Mae and Freddie Mac, the government-sponsored programs that bought up mortgages to encourage more lending and required bailouts during the 2008 financial crisis.

Exactly how far the government’s role in mortgages would be reduced was left to Congress to decide, but all three options the administration presented would create a housing finance system that relies far more on private money.

This is potentially great news if you believe, as I do, that Fan and Fred played a critical role in inflating the housing bubble to the point that it threatened the entire financial system. Their bailouts, the AP reports, are currently projected to cost taxpayers between $150 billion and $260 billion.

The Wall Street Journal’s editorialists have been writing presciently about the perils of these quasi-governmental behemoths for two decades, so I’ll trust them when they say one of the options is far superior to the other two:

Door No. 1 is the best of the lot by our lights. Under this option, federal guarantees would be limited to Federal Housing Administration (FHA) loans for lower-income buyers and VA assistance for veterans and farm programs — each a narrowly targeted market segment. A Treasury official says this would reduce the taxpayer backstop over time to about 10% to 15% of the mortgage market [down from the current level of 92%].

The Administration puts the case for federal withdrawal from the broader housing market in compelling terms: “The strength of this option is that it would minimize distortions in capital allocation across sectors, reduce moral hazard in mortgage lending and drastically reduce direct taxpayer exposure to private lenders’ losses.” Bravo.

Treasury points to other benefits: “With less incentive to invest in housing, more capital will flow into other areas of the economy, potentially leading to more long-run economic growth and reducing the inflationary pressure on housing assets. Risk throughout the system may also be reduced, as private actors will not be as inclined to take on excessive risk without the assurance of a government guarantee behind them. And finally, direct taxpayer risk exposure to private losses in the mortgage market would be limited to the loans guaranteed by FHA and other narrowly targeted government loan programs: no longer would taxpayers be at direct risk for guarantees covering most of the nation’s mortgages.”

This option would at least put Washington on a possible road to ending all federal guarantees related to housing, with Congress only subsidizing housing through its annual spending rather than sustaining two going, and ever-growing, concerns like Fannie and Freddie.

The downside? “The Administration,” the WSJ writes, “says this option could reduce access to credit for some home buyers, and that it would leave the government without the tools to intervene in a future crisis.” But that isn’t necessarily the case:

As for the credit point, other countries have high rates of home ownership with far less government support. If the government stands aside, it would open the way for alternative forms of finance, such as covered bonds, that now can’t compete in the U.S. because of government favoritism for the 30-year mortgage model. This would open options for borrowers by increasing the diversity of financing.

As for a future crisis, government intervention is less likely to be needed if the market isn’t distorted by government subsidies in the first place.

The other two options both leave the door wide open for re-expansion or for political tinkering to benefit favored groups.

The Obama administration has done a good thing in putting the end of Fan and Fred on the table. Now it’ll be incumbent on the president to work with Congress to implement whichever option it deems best.

– By Kyle Wingfield

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31 comments Add your comment

Ragnar Danneskjöld

February 14th, 2011
10:14 am

Good morning. Winding down entirely is the only rational course. The other two leave too much potential mischief for the big spenders.

Intown

February 14th, 2011
10:15 am

I’d like to see those numbers on high rates of homeownership in other countries without as much governmental intervention. Governmented back home mortgages have been the cornerstone of the American Dream since the Great Depression. I’d also like to know what the heck covered bonds are. It does not make a left-of-center guy feel good that the WSJ editorial board is behind the idea. I want to hear what pragmatic non-ideologues think.

StJ

February 14th, 2011
10:56 am

Obama is for getting rid of Fannie and Freddie? A sure sign the Apocalypse is coming.

carlosgvv

February 14th, 2011
11:24 am

Fannie Mae and Freddie Mac have been around for many years and are filled with entrenched bureaucrats. So, trying to do away with these agencies will be about as easy as trying to do away with the IRS.

Bryan G.

February 14th, 2011
11:42 am

As someone who got a great deal on a foreclosed Fannie Mae home….I’m glad they existed. lol.

But, yes, they need to be done away with.

ByteMe

February 14th, 2011
11:56 am

Testing… testing… is this microphone on??

ByteMe

February 14th, 2011
11:58 am

Weird… it’s eating comments.

This is potentially great news if you believe, as I do, that Fan and Fred played a critical role in inflating the housing bubble to the point that it threatened the entire financial system.

And there’s the problem, Kyle: what you believe is not fact-based. Fannie/Freddie were along for the ride created by the over-leveraging of the investment banks and the fraudulent ratings from the bond rating agencies.

Kyle Wingfield

February 14th, 2011
12:09 pm

Byte Me: “Along for the ride”???

Look, I probably agree with you about the culpability of the rating agencies (although it’s worth noting that the SEC helped to create the problem by allowing them to exist as an oligopoly). And of course the banks were overleveraged. But any honest evaluation of how and why they came to be overleveraged has to include such factors as the Fed’s easy money and Fan and Fred’s role in buying and selling MBSs.

Jimmy62

February 14th, 2011
12:49 pm

Unfortunately they’ll find plenty of other methods to give free money to people and thus increase their control over our lives. You really think this will last long? Soon enough there will be new legislation to provide money to people who can’t provide it for themselves so they can buy a home rather than be renters.

Fannie and Freddie were required to use those ratings agencies. By the government. Who made that decision? Most likely former Goldman Sachs employees. Who benefited? Goldman Sachs. Who is still around despite having lost billions? Goldman Sachs!

The biggest untold and ignored story in all of this is Goldman Sachs and their involvement. They drove a lot of the CDS action. They provided the government officials that allowed it to happen, and then gave Goldman Sachs billions to pay off their creditors. Just about everyone who was ever near the top at Goldman Sachs should be in jail, as well as the politicians that then appointed former Goldman Sachs execs to run Treasury and other important government positions which then allowed them to save their former company and their own asses.

Wherever you look in this mess, whatever cause you find, you see two things over and over again. Connections to Goldman Sachs and degrees from Harvard, Princeton, and Yale.

Real Conservative

February 14th, 2011
1:10 pm

Freddie and Fan played a small role in the housing bubble, but not a critical role.

Anybody following this issue closely should know that unregulated and improperly rated derivatives gave misleading incentives for PRIVATE companies to invest money into the mortgages. Remember that Fannie and Freddie were stockholder-owned, private corporations too. As a result, sub-prime loans were given out like candy.

When the bubble did burst, the foreclosure rate on subprime loans has been something like ten times greater than the foreclosure rates on loans for low-income people backed by Freddie or Fannie. And notice that foreclosure rates have been higher among higher income homeowners than among low income homeowners. Also notice that the real estate bubble burst all over the world. I’m fairly sure that Freddie and Fannie didn’t back any low income mortgages in Ireland.

The argument that private, unregulated money is the cure is backwards when we know that it was mostly private, unregulated money that got us into this mess. Did we already forget about Washington Mutual, Bear Stearns, Goldman Sachs, and AIG?

As a conservative, I’m not Freddie and Fannie’s number one fan because stockholders get the reward when things are good, but taxpayers pay the price when things don’t work out. But that’s no different than what happened with Goldman Sachs and all the rest.

We need to get our facts straight. Real conservatives believe in regulations to enforce that fundamental tenet of capitalism, transparency. Transparency is a concept that the fake conservative/plutocrats will fight tooth and nail.

The unregulated derivatives that were flying around were about as transparent as Rupert Murchoch’s discarded bath water, and that’s why all those idiots invested in them. Hence the real estate bubble.

jconservative

February 14th, 2011
1:24 pm

Kyle, excellent column and I agree with every word.

This is a two way street. The president proposed a solution. It is now up to Congress to approve or submit another proposal. To often Congress simply says “NO” and leaves it there. On this issue “NO” is not good enough.

Someone needs to borrow from former Redskins Coach George Allen; have a meeting of the minds while enjoying a dish of ice cream.

retiredds

February 14th, 2011
1:40 pm

Kyle, I am usually on the other side of your columns but you have hit this one on the head. It is long overdue. Now if Obama AND THE REPUBLICANS (especially the new Tea Party ones) will stop the “cut the budget” shell game and take on the big three entitlements – Defense, Medicare, and Social Security – I, for one, will believe they are serious about deficit and debt reduction. If they don’t, then all the grandstanding by the new Republicans, Democrats, Conservatives, Libertarians, Tea Party people, to name a few, are for naught.

Kyle Wingfield

February 14th, 2011
1:56 pm

Anyone who reads the comment by our self-appointed Authentic Right-Winger at 1:10 might fall under any number of false impressions:
– that Fannie and Freddie had nothing to do with the “misleading incentives for PRIVATE companies to invest money into the mortgages” and were not in fact front and center in the trade of the very derivatives under discussion;
– that Fannie and Freddie were truly private companies, rather than government-sponsored enterprises that succeeded in said derivatives trade in large part because of their implicit (now explicit) government backing;
– that the business of Fannie and Freddie was somehow separate from the subprime mortgage mess (see here for more: http://wapo.st/vplrz);
– that Fannie’s and Freddie’s mortgage portfolios were somehow more sound than other institutions, which would seem to run counter to their need for tens of billions of dollars in bailout money;
– that if there was a housing bubble in another country, and if Fannie and Freddie wasn’t involved in it, our conclusion must be that Fannie and Freddie didn’t play much of a role in *our* housing bubble;
– that having lightly regulated derivatives was tantamount to having “unregulated money,” even though the run-up to the housing crisis and financial panic is a classic case of bad government regulations (e.g., Basel II) rendering a false sense of security that made people believe they weren’t acting recklessly;
– that the problem with said derivatives was more about their lack of transparency rather than the willingness of investors to trade them in spite of their lack of transparency (a willingness caused in large part, as I’ve noted above, by monetary policy that was too loose for too long, and an oligopoly of rating agencies that pretty well screwed the pooch);
– that I somehow oppose transparency.

Stephenson Billings

February 14th, 2011
2:10 pm

Just the fact that Fannie and Freddie has required hundreds of billions of dollars to bail them out is enough reason for me that they should be done away with…

WillieRae

February 14th, 2011
2:44 pm

While many banks took and repaid bail out money under TARP, the $153 Billion (SO FAR) that we have dropped into Fran and Fred will never be repaid. It’s all spent and gone money.
Some estimates of our ultimate cost go as high as $400 billion for Fran and Fred.

ByteMe

February 14th, 2011
2:59 pm

Kyle, Fannie and Freddie didn’t buy the bulk of the MBSes. That distinction went to other banks and private investors. Good try, though, at trying to limit the facts to those that buttress your argument.

And you want to blame the government for the ratings agencies providing pay-for-play ratings to the investment companies shilling bad paper??? Facts are your friend, even if you don’t like them.

You can, though, definitely blame the SEC for allowing the overleveraging of the investment banks — typical of what happens when you put anti-regulation Republicans in charge.

ByteMe

February 14th, 2011
3:03 pm

BTW, I think there were a LOT of problems at Fannie/Freddie, not the least of which that they were being run like a private enterprise with an overtly public backstop, allowing them to take risks that would have sunk a typical company. But to make them the critical cog in the housing derivatives debacle and the housing bubble’s creation/destruction is just unfounded.

The Snark

February 14th, 2011
4:02 pm

The ugly truth is — and this can be misinterpreted or attacked in a million ways, but it is still the ugly truth — that home ownership is a responsibility that not everyone can live up to.

Kyle Wingfield

February 14th, 2011
4:06 pm

Byte Me: I never said Fan and Fred bought “the bulk of the MBSs,” nor did I say they were *the* critical factor. I said they had a role in the MBS market, and I said they were *a* critical factor.

While we’re at it, I didn’t lay the rating agencies’ problems all at the feet of the SEC, either. I said the SEC “helped to create the problem,” and it did — by limiting the number of agencies that could issue ratings for regulatory purposes. (See this article for more: http://nyr.kr/UxjHB) But as I said earlier, the agencies themselves are also culpable.

I think you probably agree with me on a lot of this, if you’ll read what I’m actually writing.

Real Conservative

February 14th, 2011
4:32 pm

Let’s be clear about where Mr. Wingfield and I agree.

We agree that Fannie and Freddie purchased derivatives. We agree that Fannie and Freddie was not somehow separate from the subprime mortgage mess. And taking Wingfield at his word, we agree that transparency is fundamental to a healthy free enterprise system.

We don’t agree that a loose monetary policy drove the real estate bubble. Even though we agree that oligopolies are bad, we don’t agree that derivatives were overrated because they were rated by an oligopoly of rating agencies. They were overrated because of the conflict of interests between those issuing them and those rating them.

Yup, lightly regulated derivatives was tantamount to having unregulated money. The fed and the SEC looked the other way despite having the authority to act.

Yup, the fact that the real estate boom and bust was worldwide does argue against the idea that Freddie and Fannie were a critical cause of *our* real estate bubble. There’s more evidence supporting my argument in my earlier post.

Yup, until the government took them over in 2008, Freddie and Fannie were *truly* private companies.
I’m not dismissing Freddie and Fannie’s contributions to this crisis. I’m just stating that their contributions to it are way, way, way overrated by those who want to divert attention from the main causes of the economic collapse.

Last, but not least, I’m not a self-appointed right-winger. There’s a big difference between a conservative and a right-winger. I’m a conservative. Plutocrats posing as conservatives are right-wingers. One example of such a poser is the guy who owns the Wall Street Journal and Fox News.

Question Authority

February 14th, 2011
4:40 pm

Just eliminate the Federal Reserve. Without the Fed and the immoral practice of fractional reserve banking the problems go away on their own and only the savings of individuals and the interest rates that the market sets will be the determining factor for access to credit. The market is self-correcting, self-sustaining, and provides everything in a manner that is functional and proper. What we have now is nothing more than a government-created monopoly that serves the interest of the bankers at the expense of the american citizens.

END THE FED.

Question Authority

February 14th, 2011
4:41 pm

At the root of every single problem in this crisis is government. Getting them out of the market is the only proper solution. Government has absolutely no place in a free economy.

ByteMe

February 14th, 2011
4:48 pm

I never said Fan and Fred bought “the bulk of the MBSs,” nor did I say they were *the* critical factor. I said they had a role in the MBS market, and I said they were *a* critical factor.

And yet, they weren’t, no matter how much you want to claim to the contrary.

Lots of private hedge funds “had a role” in the MBS market, but you’re not blaming them for the housing bubble. Bear and Lehman had a HUGE chunk of the market, but you don’t mention them. You also don’t mention how much Bear and Lehman paper Fannie/Freddie had for their short-term investments that might have helped make them financially weaker.

Your article lays it at the feet of Fannie/Freddie without really listing all the other factors that were much more important than Fannie/Freddie having about 25% of its portfolio in subprime. I read what you wrote, maybe you need to take a look at what you’re writing and try to give people a clearer view of what went on.

Kyle Wingfield

February 14th, 2011
5:00 pm

I stand corrected, Byte Me. Apparently you and I don’t agree on much of anything, including the respective definitions of “a” and “the.”

There are lots of aspects of the housing and financial meltdowns that I didn’t mention by name in this post. I can’t imagine that any rational person would expect an exhaustive description of the roots of a multitrillion-dollar global crisis in a 700-word blog post focusing on the president’s proposal(s) for two particular players.

JF McNamara

February 14th, 2011
5:09 pm

Kyle woke up in a good mood today. Praising Obama? You must’ve had breakfast in bed and got a lot of kisses from the wife this morning.

I say they should be wound down too. Save 20%, Be credit worthy, and then buy a home from a private lender. We’ve already seen the failure of this model. Shut it down before people forget and we do the same thing again.

Me Too

February 14th, 2011
5:15 pm

Fannie and Freddy didn’t cause the mess anymore that AIG, Bank of America or Citi. It’s just another GOP lie!

DawgDad

February 14th, 2011
6:20 pm

Right idea being done for all the wrong reasons. You don’t believe that? Then why continue FHA loans? Why should the government make an otherwise “unworthy” borrower more attractive? Isn’t that, on a runaway freight train, what led to the meltdown in the first place? Yes it is.

Freddie and Fannie were a major corruption waiting to happen, and guess what? It did. So tell me again, why do I want the government ANYWHERE NEAR my health care? Easy answer: I DON’T.

killerj

February 14th, 2011
6:29 pm

Thank you jimmy62,scam of the century,lets not forget how many Goldman and Sachs executives are all in high government offices still taking everyone to the bank,be sure to include Bear Stearn also.Go Tea Party.

Rafe Hollister

February 14th, 2011
7:40 pm

I agree with Obama and option 1, however, don’t think it will ever happen. The people who lobbied hard to make more people eligible to buy homes have not engaged on this proposal yet. Just wait til Sharpton, Jackson, and Barney Frank and company find out that some of their supporters are no longer going to be “encouraged” or “incentivized” to buy a home.

David

February 15th, 2011
7:54 am

Please, sign the petition to reduce the governments dividend on Fannie and Freddie debt.
http://www.ipetitions.com/petition/fannieandfreddie/

Duude

February 21st, 2011
10:57 am

Obama has fooled you. The expansion of FHA would just replace Fannie and Freddie’s exposure with direct government subsidies. That’s no solution at all. Even at current, the FHA grants loans with only a 3% down payment and FICO scores as low as 500. That’s far more liberal than Fannie or Freddie. That isn’t a solution, that’s a disaster. What’s more is the federal government grants loans in a number of different ways. Currently, the agricultural department will lend you 100% of purchase price for rural land so long as the USDA agrees that the land you’re buying is indeed rural. You don’t even have to have a farm. This is open to anyone buying rural land. No down payment at all.