Our view on housing finance: Don't let Fannie and Freddie return to old neighborhood Updated 15h 11m ago
As bailouts go, nothing quite matches the torrent of taxpayer money still pouring into Fannie Mae and Freddie Mac, the housing giants that now guarantee nearly half of the nation's $11.7 trillion in mortgages.
To cover loans that go sour, the federal government has already doled out almost $145 billion, and the non-partisan Congressional Budget Office estimates the final tab will be about $381 billion. That's about half the size of the 2008 bank bailout but, unlike that bailout, most of this money won't get paid back. And even now, there's little talk in Washington about how to fix the problem.
Fannie and Freddie can't be allowed to collapse. The fragile housing market would collapse along with them. Nor can they go forever as wards of the state, soaking up taxpayer cash. They also should not be allowed to go back to their unusual former status as publicly traded companies that are also "government-sponsored enterprises." That's why they got in trouble in the first place, paying outsized compensation and backing risky mortgages because politicians of both parties prodded them to do so.
Fannie and Freddie need to be rethought entirely, if not eliminated outright. And the time to start planning for that is now.
If the companies are eliminated, the process would have to be gradual. Fannie and Freddie are pretty much alone in propping up the housing market, backing three-quarters of the new loans being made this year.
For that reason, a less radical approach may be in order — one that would make mortgage money available at affordable interest rates while limiting taxpayer exposure to bad loans. One intriguing possibility is to gradually replace Fannie and Freddie with non-profit cooperatives owned by banks. That is how MasterCard and Visa used to be structured, and how the 12 regional Federal Home Loan Banks are structured today. Those regional institutions — which lend money to banks, which then lend to home buyers — weathered the financial storm in part because of an ownership structure that keeps banks liable for loans they make.
The Obama administration has opted to largely ignore the dilemma for the time being. Failing to deal with the fate of Fannie and Freddie is the most glaring omission in the financial reform bill President Obama hopes to sign by July 4.
Delay could be problematic because, as time passes, a necessary sense of urgency will undoubtedly fade. At that point, expect the companies — and their powerful allies in Congress and the housing industry — to start lobbying for a return to the way things were.
Despite what their critics assert, Fannie and Freddie were not primarily responsible for the financial crisis. They were late to the game in subprime mortgages and always focused mostly on backing standard, fixed-rate mortgages. But these institutions were founded on faulty premises.
Their "American dream" mission of profitably making risk disappear, so that banks would lend and people could buy their own homes, was always a fantasy. They merely took risks from banks and piled it on the taxpayers. Now everyone is paying the price.
