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The future of Fannie Mae and Freddie Mac

Mitchell Hartman Aug 17, 2010

The future of Fannie Mae and Freddie Mac

Mitchell Hartman Aug 17, 2010


Kai Ryssdal: Alright, so we’re going to take this in order. First, the bad news about the actual housing market. Although builders broke ground on slightly more new homes in July than they did the month before, they are clearly not so optimistic about next month. They filed fewer permits for future construction. That number, future permits, is down to a 14-month low.

In Washington, meanwhile, the news was of the financing of the housing market. Folks from the Treasury Department, some big banks and a bunch of academic economists were all talking about Fannie Mae and Freddie Mac. They, as you might remember, are big mortgage companies that were so dysfunctional the government took ’em over two years ago. Together, they owe taxpayers around $150 billion. Pretty much everybody agrees they need to be fixed. But there’s a problem with that. It is called the American economy.

Marketplace’s Mitchell Hartman explains.

Mitchell Hartman: Fannie and Freddie got into trouble during the housing bubble, buying up and repackaging dicey home loans that turned sour. Since being taken over and bailed out by the government two years ago, they’ve gotten religion. They’ve tightened lending standards, and their portfolios of new loans are actually performing pretty well.

And now, says Guy Cecala, publisher of “Inside Mortgage Finance,” they’re more important than ever.

Guy Cecala: Upwards of 90 percent of all mortgages being made now carry some sort of government insurance.

Private investors have all but vanished from the secondary mortgage market — a crucial link that frees up money so banks can make fresh loans to home buyers. And most of that slack has been taken up by Fannie and Freddie.

Cecala: The housing market is still on federal life support. It’s very tough to talk about pulling the plug on somebody who’s basically keeping it alive.

Republicans and free-market economists say we can’t afford to leave these government-owned mortgage giants plugged in anymore. They want to gradually wind them down. They’re worried about adding to the mounting federal deficit by guaranteeing Fannie and Freddie’s future losses indefinitely. And they think the private sector would do a better job of financing the housing industry long term.

But curtailing the role of Fannie and Freddie right away could set the economy way back, says Wharton economist Susan Wachter. She was on the panel at the Washington housing summit today.

Susan Wachter: Without them, without the government support at this point, we would be in a serious recession again. A double-dip for sure.

One result, economists say, would likely be higher interest rates to cover the increased investment risk on mortgages not backed by the government. Which in turn would lead to falling home sales — and another round of job losses in construction, real estate and home improvement.

In the short run, says Columbia University economist Christopher Mayer, there’s nothing to do but keep propping up housing with every available tool — from low interest rates, to Fannie and Freddie’s 90-percent lock on the mortgage market.

Christopher Mayer: The time to get rid of these things is not in the middle of a major housing crunch, because everyone understands that we can’t risk our nascent recovery turning south.

If we did start to fiddle, Mayer predicts, the consequences could be disastrous — starting with another 10 percent drop in home prices.

Mayer: We would see banks on the verge of failure again, and we would see Fannie and Freddie with hundreds billions more in losses.

Of course, it’s exactly that risk to U.S. taxpayers — of huge future losses on government-backed mortgages adding to a swelling federal deficit — that’s driving the debate about Fannie and Freddie.

I’m Mitchell Hartman for Marketplace.

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