A world without Fannie Mae and Freddie Mac

Marketplace Staff Feb 10, 2011

A world without Fannie Mae and Freddie Mac

Marketplace Staff Feb 10, 2011


Kai Ryssdal: The American housing market will be front and center in the news tomorrow. We’re expecting the White House to lay out some proposals for how to reform Fannie Mae and Freddie Mac. On the face of it, should be easy. The government owns them, after all.

But that’s kind of the problem, because the general idea behind reform is to get the government out of the mortgage business. And replace it with, well, something. Except nobody knows exactly what.

We’ve decided to explore what mortgage life would be like without Fannie and Freddie. So we called up Peter Goodman, he’s the business editor at the Huffington Post. Hey Peter.

Peter Goodman: Thanks for having me on.

Ryssdal: So we have to stipulate a couple of things, I suppose, right? One is that change will not happen instantaneously to Fannie and Freddie. And two, is that nobody really wants to do any more damage to the housing market. But with those parameters in mind, what happens if Fannie and Freddie just go away?

Goodman: Well I mean, if we’re imagining this fantasy scenario where there’s no Fannie and Freddie, it’s harder to buy a house. There are fewer people who can qualify for mortgages, mortgage rates go up because you have much less of a subsidy from the government and the price of houses goes down, and that hits the economy in a whole bunch of ways. The first thing that happens is a lot of people for whom the home is the ultimate asset can’t borrow against it to start a business, they can’t tap their equity to send a kid to school, to buy a new car. And there’s less spending power in the economy.

Ryssdal: OK so let’s play out blue sky option number two, which has been bandied about out there a little bit this morning: That the government is not in the business of these government-sponsored enterprises like Fannie and Freddie, but they do maintain some sort of guarantor of last resort. But most mortgages come from and are backed by the private sector. What happens?

Goodman: I think a lot of really bad things probably happen. Let’s remember how we got here, by having a government backstop on Fannie and Freddie, which are short of public and short of private — they’re public when it comes to time to divvy up the losses, and during boom times, when executives are cashing out huge bonuses and they’re being used to enable a whole bunch of casino-style gambling on mortgages on Wall Street, they’re functioning like private companies. If you shift that fully to the private sector, you’ll kind of get the worst of all possible worlds, I imagine. In that you won’t have the support for the housing market, you won’t have as much lending to the lower-income people. In the meantime, though, you’ll still have the excessive gambling on Wall Street with smart investment bankers knowing fully well that if institutions get too big to fail, and the losses come, the taxpayer will be there to bail them out.

Ryssdal: Why do we have Fannie and Freddie in the first place? Why do we have government guarantees on mortgages? It’s not like they have it in other countries any place.

Goodman: We have a belief in home ownership. What we have now is a perversion of a good idea. And the good idea being that when more people own things, people are more inclined to take responsibility for those things. So we all know that if somebody owns a home, as opposed to renting a home, they’re more inclined to think about litter, burglary, a sense of community. They’re just more likely to look after the place. Unfortunately, you can build something toxic on top of that truth and that’s what we did in boosting home ownership rates artificially with too much cheap money, and now we’re all paying the bill for that.

Ryssdal: We haven’t talked at all about the political part of this whole exercise, which is that Democrats and Republicans in Congress and President Obama in the White House and probably whoever’s in the White House after President Obama and whoever’s after this Congress, is going to be talking about the same thing. What’s likely to happen at some point?

Goodman: What’s likely to happen is some incremental nod toward pulling the government back from financing home purchases, that are slow, deliberative. The Obama administration joins with Congress to declare victory over something incremental, and they kick the can down the road and basically hope that economy starts growing and that fixes the housing market as more people have more money to spend.

Ryssdal: Peter Goodman, he’s the executive business editor at the Huffington Post. His book is called “Past Due: The End of Easy Money and the Renewal of the American Economy.” Peter, thanks a lot.

Goodman: Thanks so much.

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