Friday, September 12, 2008

Do We Even Need Fannie and Freddie?

Does the United States even need organizations like Fannie Mae and Freddie Mac? Most developed countries don't have such organizations. Why do Americans assume they are necessary for a functioning mortgage market? Professor Richard Green ponders, "What has been the real benefit of Fannie and Freddie?"
It is almost certainly not homeowning, and it is almost certainly not funnelling money into underserved neighborhoods or toward underserved borrowers.

Rather, is has been the transfer of interest rate risk from households to investors. So far as I know, the US is the only country in the world with long-term, fixed-rate, 95 percent LTV loans that do not have prepayment penalties. When interest rates rise, borrowers are protected; when they fall, they are not made immobile by yield-maintenance and lockout clauses. The low down payments (and five percent equity seems to be OK) effectively give households with modest incomes access to capital markets. I have written elsewhere that I believe that the peculiar structure of Fannie and Freddie has helped bring about the unique American mortage.

One could argue that the current environment shows that none of this has been worth it. But I would disagree with that argument.


  1. The politicaly incorrect truth, specifically that many (greater than half?) of Americans do NOT deserve to own a home, is what is necessary to set us free...

  2. And what is wrong with helping enable more people to be homeowners? Go to a neighborhood, any neighborhood, ... or to a condo building, any condo building ... And compare side by side the homes that are owned to those that are not ... and observe the vast differences between the two ... both in how well kept up ... AND the difference with the way the occupants act. Homeownership brings responsibility with it. It brings about the kind of people that a country wants to see. The mission of Fannie and Freddie is a good one. A really good one.

    It has nothing to do with anyone "deserving" anything. It's all about what kind of society do we want? A society of responsible people is a good thing.

  3. Lance said...
    It's all about what kind of society do we want? A society of responsible people is a good thing.

    But Lance, you’re confusing what SHOULD happen with what WILL happen. We already see what home ownership at all cost has brought us, and it doesn’t look, nor is there an incentive to be, responsible.

  4. The real benefit of F&F is to funnel funds to the Republican and Democratic parties, and find jobs for consultants and other party officials during off-years. That may sound cynical, but look at the appointments to F&F in recent years, and contributions to the parties made by F&F employees. F&F also hired a bank of lobbyists to help battle reform plans on Capitol Hill. Since these concerns are now directly controlled by the Treasury, I am waiting to see what happens to the political contributions and lobbying activities. Is the taxpayer going to continue subsidizing these activities as well?

  5. The existence of Freddie Mac & Fannie Mae seem to be a habit hard to break. They’ve been there forever. And what would happen when they disappear? I don’t know. But I am inclined to agree with you. Do we really need them? What are other alternatives if they go away?

  6. If F&F go away, we go back to a system of five-year mortgages instead of 30-year. That is how people bought houses before the Depression and creation of the agencies that became F&F. If we go back to the old days, you would get your mortgage from your local bank, which knows you and knows you are of the reputation likely to repay.
    Of course that sort of system might not work today. So we could do away with F&F and allow the private market to pick up the business, wrapping U.S. home mortgages in 30-year debt instruments sold on the debt market. You have to ask yourself after all this mess what fool would buy a debt instrument containing U.S. mortgages, so there would be a risk premium in terms of higher interest rates.
    Secty Paulson seems to be referring to this sort of system when he talks about eventually reducing the size of F&F at the rate of 10 percent a year, leaving the two only 10 percent of its current size in a decade.
    Who loses under this system: those who can't normally get mortgage loans: people with lousy credit histories, low-income and people who want to live in unfavored areas of our cities.

  7. "low-income and people who want to live in unfavored areas of our cities."

    Like ... Manassas, Prince William County, Winchester, West Virginia, those parts of Washington DC.