The Fuzzy Future of Post-Fannie-Freddie Homeownership
If you're thinking about buying a house, thank the U.S. government in advance. They guarantee more than 96% of new mortgages -- a guarantee that means you're more likely to get the money you need. In fact, according to Bloomberg, since 2007 there has been exactly one company that has securitized mortgages not backed up by the government. So why does everyone -- and I mean basically everyone -- seem to hate the institutions doing the backing up?
Well, because they're Fannie Mae and Freddie Mac, whose bailout has cost taxpayers more than $100 billion, so far. Along with a third "government-sponsored enterprise" (GSE), the Federal Housing Authority, they make up what the Wall Street Journal's editorial page today referred to as the "three horsemen of the taxpayer apocalypse."
It's less colorful, but the Obama administration's rhetoric is hardly in disagreement. Last month they laid out three scenarios for the future of the mortgage market; all of them involved phasing out Fannie and Freddie.
Yet the big overhaul of the financial system passed last year -- the Dodd-Frank bill --carefully avoided touching the GSEs, and regulators seem to be following that lead. This week they're passing bold new requirements for banks keeping "skin in the game," forcing them to hold on to a piece of the financial products they used to package and sell off, risk-free. But the mortgages guaranteed by Fannie, Freddie and the FHA are exempt. Remember, that's 96% of new mortgages; No wonder Robert Davis of the American Bankers Association told MarketWatch it "kicks the can down the road."
It's all the rage now to hate Fannie and Freddie, but with all those homeowning voters hanging in the balance, figuring out what to do with them seems to be a bit more difficult.
At least for politicians. A group of professors at the NYU Stern School of Business has one set of prescriptions for what they call "the largest hedge fund on the planet." And they've also put together a great reading list of alternative proposals. Take a look and tell us what proposal you favor.