May 15, 2012

Leaving Fannie Mae, Freddie Mac As Is Risks Another Housing Bubble

Summary

While a privatized housing finance system would be ideal, it is likely that we need a government medallion (or backstop) for mortgage lenders. The idea would be to scale down the guarantee over time and let the private market return. A cooperative structure for a national securitization operation would eliminate the "cookie jar" nature of Fannie Mae and Freddie Mac.

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This excerpt was originally published in US News and World Report. Read the full text here.

Last week Fannie Mae, one of the two mortgage giants in conservatorship with Freddie Mac, reported a $2.7 billion profit for the first time since the financial crisis. This seemingly good news may actually be a reason to finally do something about Fannie and Freddie rather than pretending that they will be just fine on their own.

Fannie and Freddie have cost U.S. taxpayers over $170 billion to date. As Congress struggles with the decision to perpetuate them in some form or pull the plug on them, losses will continue to mount.  Specifically, if the administration's recommendation for principal reduction for borrowers is adopted by the Federal Housing Finance Administration, Fannie and Freddie's regulator, losses to Fannie Mae and Freddie Mac would be in the billions.

As we move through the process, it is important to remember the U.S. housing market was not the only one to have housing bubbles that burst, and Fannie and Freddie are not solely to blame. Spain, Portugal, France, Denmark, Greece, and other European nations had housing bubbles as well (and their housing prices continue to deflate). Japan has had a housing bubble that has been deflating for years. China has experienced a "double bubble" like Australia. Even Canada experienced a housing bubble.