Marketplace Scratch Pad

Fannie and Freddie

Scott Jagow Mar 23, 2010

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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