Fannie and Freddie

Treasury Secretary Tim Geithner was on The Hill today talking about mortgages and housing. This is a good subject for debate -- should the government be getting more or less involved in the housing market?

Geithner, for one, isn't ready to pull the plug on the guarantees provided by Fannie Mae and Freddie Mac. Instead of making a decision now, the Treasury will study what to do. From The Street:

Geither said that the failure of Fannie Mae and Freddie Mac was part of a "broader crisis that revealed structural flaws in the entire housing finance system." He added that the case for providing direct government support to stabilize mortgage credit "would thus rest on the judgment that mortgage credit is particularly important to households and the economy overall."

"Moreover, the relative size of the housing market and high correlation of losses it can experience in times of financial distress means that government may be best suited to serve as a source of stability in a responsible manner," Geithner added.

However, despite calls from Republicans to start privatizing Fannie and Freddie, the government's plan is to wait at least a few more months before doing anything with the mortgage giants. From the Wall Street Journal:

But industry analysts say that at some point, delaying action could breed uncertainty that could be equally troublesome for markets. "The problem you have with constantly punting the issue down the road is it is going to be a bear to wean the market from government support,'' said Thomas Lawler, an independent housing economist in Leesburg, Va., who worked at Fannie Mae for more than two decades. "The longer a market gets used to everything going government, the harder it is to get off of that.''

So, the choice is: Stop nursing the housing market through the government's huge role in Fannie and Freddie and risk a further collapse of home prices. Or continue to prop up the market until the government figures out a new model for the public-private intersection in housing.

What do you think is the best approach?

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Scott, one more metaphor re gov't involvement...

Once upon a time forest fires were considered a bane on the beauty and survival of our nation's wooded resources. The accumulation of dry undergrowth and deadwood set the stage for catastrophe when fire prevention was out-gunned by fire fuel. Eventually it was accepted that fire is beneficial to the health and well-being of the environment. Chance the Gardener spoke a similar message in "Being There". Allow the dead growth to burn; remove the diseased growth; provide sunlight and water to the new growth. New growth needs the nutrients of the dead old growth.

More gov't regulation stifles the new growth; it entrenches the established organizations. By preventing failure now, our gov't is setting the stage for a future catalclysm. Metaphorically speaking, of course....

Excellent analogy!<p>
The wildfire is coming, don't get burned.

Instead of saying "further collapse of home prices", wouldn't it be more accurate to say "correction to affordable levels"

I have to say that I agree with Mr. Lawler that the longer the Federal Government is involved in any aspect of private enterprise, the less likely it'll get out of it.

Take the example of Flood Insurance --

The combined ratio of premium vs losses on flood insurance was so bad, that no insurer that wanted to stay in business would agree to insure a building located on a known flood plain. So the government came in and subsidized the flood insurance market. The result: a housing boom in places where a flood is likely to happen. If the homeowner is dumb enough not to purchase flood insurance? No problem - Federal disaster aid will come along with low-cost loans to help people rebuild.

Now the government is in a position where they can never give back flood insurance to private insurers, and they are stuck footing the bill whether homeowners buy flood insurance or not.

The solution: Under the mandates of immonent domain and wetlands preservation, break out the backhoes and turn all those houses back into the swamps they were meant to be. Then the government can divest itself of flood insurance to the private sector.

Perhaps a similar solution is in order for Freddie & Fannie.

Why don't they just put Rahm Emmanuel in charge - he did a great job when he was a director for Freddie Mac.

<i>should the government be getting more or less involved in the housing market?</i><p>
Can they get any more involved? Oh that's right, Big Brother won't stop until housing has no market and every "intersection" is a Section 8 intersection.<p>
<i>government may be best suited to serve as a source of stability in a responsible manner</i><p>Because the people can be so unstable, this is doubleplusgood!<p>
<i>However, despite calls from Republicans to start privatizing Fannie and Freddie</i><p>
Because a "partially" privatized Fannie and Freddie used to work so well! NO don't start to privatize them! Kill them! Kill them with fire! Fanniestein and Freddistein were never meant to exist. They are loathsome zombie monstrosities and they are destroying the village.

Odd, this opinion was nowhere to be found during the boom years. Everyone was selling and soaking up profits. No one cared who, how or why. But now things went bad and people are pointing and saying the government can't do anything right.
The fact of the matter is this, both the markets and the government can really F things up if we let them. Government needs to regulate but not participate. Pretty simple.

is it that easy to separate out participation verses regulation? Wasn't Freddie and Fannie regulators?

I had that perspective hence I didn't buy. Not everyone was selling.

<i>But now things went bad and people are pointing and saying the government can’t do anything right</i><p>

I never said that. Here is what a good government can do and do well: it can form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity. <p>

President Obama: "There's more work to do to provide greater economic security to a middle class that has been struggling for a decade."

The middle class has always struggled. And as long as it continues to exist it will struggle. To be middle class is to struggle. Struggling is good. It creates wealth and it requires only Liberty. You can't secure people by controlling them. You can't stabilize home/loan prices by setting them, incentivising them, by taking them over or by otherwise manipulating them.<p>
Benjamin Franklin: "Those who would give up Essential Liberty to purchase a little Temporary Safety, deserve neither Liberty nor Safety."

I am currently a renter and plan to buy in about 3-4 years. I hope the market "crashes" back down to more affordable levels. Housing prices rise with income, why would anyone in their right mind want to prop them up to unaffordable heights using taxpayer money?


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