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Many have argued that Congress historically has done too little to “reign in” Freddie Mac and Fannie Mae. Certainly, many in Congress argue they’ve exercised too little influence and control over these GSEs.
I, on the other hand, argue that Congress has had too much influence over mortgage giants Fannie and Freddie, both of whom are Government Sponsored Enterprises (GSEs). The fact is, we’re not dealing with a global economic crisis because Congress did too little, we’re in this mess because they did to much.
As I’ve argued in the past, lobbyists in Washington convinced some members of Congress to pressure Fannie and Freddie to better support “low income housing” (AKA, the sub-prime mortgage market). When the GSEs began to support the market, it sent a signal to banks and mortgage companies everywhere that it was okay to invest more heavily in a sector of the housing market with far greater risk.
Sub-prime loans have a much higher failure rate, which is why, in past decades, Fannie and Freddie offered limited support for these types of loans. In turn, lenders tended to hedge the risks of such loans by charging higher interest rates and other fees. The higher rates and fees helped cover inherently higher costs in this sector of the housing market, where foreclosure are far more common.
When Congress pressured Fannie and Freddie to reverse course and go against long-standing principles of the market, it set up the destructive chain reaction witnessed by us all these past months. Have we reached bottom yet? Everyone hopes so, yet the market dropped 18% just this past week. While we all hope we’ve bottomed out, it’s clear that markets could technically continue to sink.
Once the crisis has passed, however, what should the government do with Fannie and Freddie? Will their GSE status be restored, will they companies be disbanded, or should they be fully privatized?
I always felt Congress liked having Fannie and Freddie as GSEs because it gave them, and the president, bragging rights on the housing market. Since the 1970s, the US housing market has continued to grow, with slow but steady rises in American home ownership each year.
But it seems clear now that Congress should have as little direct influence on the markets as possible. Certainly, the federal government should retain their “watchdog” status, ready to pounce on illegal practices. But government should not be able to tamper with those markets; even for noble goals, like increasing support for low income housing.
Which is why, after we have moved past this crisis, the federal government should move to fully privatize Freddie and Fannie. While the move would likely put a strain on both companies to adapt to their new circumstances, it would ultimately strengthen them, and the market as a whole. And the rest of us can rest a bit easier knowing that our politically correct elected officials have less say on the way the markets should operate, not more.
Last 3 posts by phillenbrand
- Loan Modification Fix - July 20th, 2009
- Free Home Loan Modification Help For Homeowners - July 10th, 2009
- Would One Mortgage Regulator Work? - May 21st, 2009
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