Freddie and Fannie: Na Na Na Na, Na Na Na Na, Hey Hey-ey, Goodbye

The White House has issued a proposal recommending the gradual elimination of government-sponsored mortgage backers Fannie Mae and Freddie Mac.  Fannie Mae and Freddie Mac were brought under government conservatorship in 2008 in a costly taxpayer bailout.  We wrote about this in June of 2010, supporting the gradual winding down of these companies with solutions for securitization of loans, such that the banks would be able to manage the credit and interest rate risk.

The government is proposing a gradual phase out, saying “Going forward, the government’s primary role should be limited to robust oversight and consumer protection, targeted assistance for low-and moderate-income homeowners and renters, and carefully designed support for market stability and crisis response.” 

The proposal has three options:

1. Sharply curb government’s role in mortgages – “… limiting it to FHA and other programs targeted to creditworthy lower- and moderate-income borrowers.  The strength of this option is that it would minimize distortions…. 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.”  The drawback of this option is that loans will likely cost more for borrowers.
2. Support the mortgage market in a crisis – Government’s role would be limited to FHA, etc. as in option one.  “In this option, however, the government would also develop a backstop mechanism to ensure access to credit during a housing crisis….”  The drawback, again, is that loan rates will rise for borrowers.
3. The government would offer a permanent backstop for many mortgages, but would cover costs with fees (to protect taxpayers) – “Under this option, as in the previous options, the mortgage market … would be driven [mainly] by private investment decisions with private capital taking the primary credit risk.  However, to increase … access to mortgages for creditworthy Americans – as well as to ensure the government’s ability to respond to future crises – the government would offer reinsurance for the securities of a targeted range of mortgages….”  The drawback, here, is government mismanagement as is seen today.

As we said in June, though the current government would appear to disagree, it appears that the best course of action is to take our lumps and go with option one.  In the short term, loan interest rates will rise, but inflation will be kept in check and the market will benefit from capital flowing into it. 

As for Fannie and Freddie, who have soaked up hundreds of billions of taxpayer dollars, we offer up this farewell message, as recorded by Steam in 1969:  “Na Na Na Na, Na Na Na Na, Hey Hey-ey, Goodbye!!!”