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Should home ownership be the dream?
Gregory Ip
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TEXT OF COMMENTARY
KAI RYSSDAL: Almost 70 percent of Americans own homes. It's practically the symbol of the Amercan dream. But does that sense that we ought to be in the real estate market get us and our financial institutions into trouble? Commentator Gregory Ip says we need to decide that before we decide what to do with Fannie and Freddie.
GREGORY IP: Americans woke up today to learn the federal government had basically taken over Fannie Mae and Freddie Mac. It's one of the biggest government takeovers in history.
This moment, though, has been years in the making. We knew these companies were a potentially dangerous hybrid. They are chartered by Congress to promote home ownership. But they are owned by shareholders who want the maximum possible profit. This means that they could take big risks with the knowledge that if they got into trouble, they'd be too important for the government to allow to fail. The Bush administration tried to constrain Fannie and Freddie, just as its predecessor did. But with the support of many in Congress the companies always fought off these efforts.
And then the housing crisis hit. Far from shrinking them, the Bush administration was now forced to ask the companies to expand their role of buying and guaranteeing mortgages, because, quite simply, private investors no longer wanted to. Unfortunately, just when the economy needed Fannie and Freddie the most, they couldn't do the job, because they had lost so much money on the mortgages they already owned.
Treasury says it acted this past weekend to keep the housing and financial markets stable. But it still hasn't answered the question: What role should the government play in home ownership, and do these companies have a part to play? Yes, common stock holders have been punished. They've lost almost their entire investment. And over time, the companies will have to shrink under the terms of the deal with Treasury. But Fannie and Freddie will continue to exist unless and until Congress revokes their charters. And the final decision of the companies' fate will rest with the next president and the next Congress.
Then there's the question we as a country must answer: How much should we promote home ownership? If we conclude taxpayers should back most mortgages, we must find a transparent and accountable way to do it. It's not at all clear that these companies can accomplish that.
RYSSDAL: Gregory Ip is the U.S. economics editor at The Economist magazine.
Simple question: Has marketplace done any stories about the American phenomenon of subsidizing real estate?
Do other developed countries have a problem with people not buying houses, living in neighborhoods, raising families, etc? Thinking critically about this, why does such a market-distorting subsidy exist in the USA, and who does it benefit?
As a taxpayer (and future homebuyer), I'd like to know.
This is not the first time we have had a crisis in the financial services industry, focused on the mortgage financing. In 1981, interest rates had risen to a level that banks were forced to pay for finds at much higher rates than they were able to receive from their mortgage portfolios. The result was the destuction of many savings and loan associations and the introduction of the variable rate mortgage. It was not long before banks realized that the problem with variable rate mortgages is that they locked spread. The creation of mortgage-backed securities can be traced back to that situation.
Bottom line. If we are going to support home ownership the extent we always have, we can expect category 5 financial hurricanes from time to time.
