Debating the future of Fannie, Freddie

Mitchell Hartman Aug 20, 2010

Debating the future of Fannie, Freddie

Mitchell Hartman Aug 20, 2010


TESS VIGELAND: Fannie and Freddie — Couple of good names for a favorite aunt and uncle, yeah? Well suffice it to say, they are far from favored in Washington these days. Fannie Mae and Freddie Mac were on the hot seat this week. Figuratively speaking, of course. The home mortgage giants — currently in U.S. government receivership — are facing all kinds of questions about their future role in the housing market.

Marketplace’s Mitchell Hartman has been following the story. And Mitchell we keep hearing how important these guys are — guy and gal, actually — remind us what they do?

MITCHELL HARTMAN: Fannie and Freddie are these government-chartered, and of course now government-owned mortgage institutions. Basically, they do two things. First of all, they set underwriting standards — pretty tight ones right now — and that guarantees home loans. Then they buy them up and repackage them as mortgage securities. Now that is key because without that banks can’t move mortgages off their books and then lend again to the next home buyer that comes through the door.

VIGELAND: All right. So what happened this week on the Fannie and Freddie front?

HARTMAN: Well, it was a one-day talk fest, more or less, on what to do with these two giant government-lending institutions. Treasury Secretary Timothy Geithner sort of set the tone.

TIMOTHY GEITHNER: It is not tenable to leave in place the system we have today. We will not support returning Fannie and Freddie to the role they played before c, where they fought to take market share from private competitors while enjoying the privilege of government support.

And so now we’ll see the debate play out. The administration will have its reform plan ready in January. Congress is going to start work. Republicans already have position papers for what they want.

VIGELAND: All right. So let’s go through what they do want. A lot of different folks wanting a lot of different things.

HARTMAN: Right. And, you know, it kind of breaks down to Democrats and populists on the one hand. They want some continued government role, although definitely a smaller role to support home lending. And Republicans and fiscal conservatives say, basically, it’s time to cut the government life line; let the housing sector rely on private investors and financial markets alone. But as you heard from Geithner, it’s not like anyone really wants to leave the situation as is. Everyone says they want the private sector to start investing again and take on some risk. But here’s the irony: Most economists agree that is is unbelievably dangerous to try to dismantle these government-lending institutions.

VIGELAND: Why is that? Why is the economy so vulnerable if this happens?

HARTMAN: Well because right now Fannie and Freddie guarantee most of the new homes loans made in this country. Private investment all but vanished after the financial crisis. And these are, more or less, the secondary mortgage market right now. That is what is freeing up banks to lend. Withdraw the huge government prop for housing now and interest rates will probably spike. Mortgages will be harder to get. You’ll probably see layoffs in the housing sector. It’s not pretty.

VIGELAND: And yet it does seem like everybody does agree that Fannie and Freddie at least have to shrink, if not shut down. So what, are they waiting for the housing market and the economy to make a miraculous recovery?

HARTMAN: Conservatives aren’t. They want to wind down the government lenders, more or less, asap. But that raises a big question: Whether private investors, absent the government’s stamp of approval on the mortgages, will step in. After all, banks are still shaky. So what if they just don’t show up to the party that the Republicans want to throw? Or what if they do show up, but they demand huge down payments? Let’s say 30 percent down on a normal mortgage. Or they charge much higher interest rates. And as I said, progressives still want some government entity to stick around and back up mortgages so that middle class families can afford to become home owners. They danger here is, you leave a big chunk of the U.S. economy dependent on these quasi-government mortgage companies — they’ve got bad debts on their books and they’ve got a guarantee from taxpayers to cover all of their losses indefinitely. I mean that is a place no one – conservative or liberal — wants to go. But they don’t want to kill the U.S. housing market on the way to getting to a better place either.

VIGELAND: All right. Marketplace’s Mitchell Hartman joining us. Thanks so much for your help.

HARTMAN: You’re welcome.

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