Economics, Financial Services

How to take away Fannie Mae and Freddie Mac’s nationalized monopoly

Image Credit: Shutterstock

Image Credit: Shutterstock

US residential real estate credit is one of the largest asset classes in the world, and it’s largely backed by taxpayers.

Taxpayers fund or guarantee more than 90% of new mortgages. This arrangement is not only a government monopoly; it’s inherently unstable.

Private capital must be brought back to the mortgage market to increase the resiliency and dynamism of the housing financial system, according to AEI Visiting Scholar Phillip Swagel, who testified on Tuesday before the Senate Banking Committee. If you missed it, here’s the skinny:

 “Fannie Mae and Freddie Mac stand behind virtually all new conforming mortgages through the two firms’ guarantees on the mortgage-backed securities (MBS) into which the two firms bundle the home loans they purchase from originators…

With the U.S. Treasury committed to ensuring that Fannie and Freddie remain solvent, the U.S. government effectively backstops conforming loans, leaving taxpayers exposed to considerable losses in the event of another housing downturn…

It would be useful for reform to allow for a diversity of sources of funding for housing, and for private capital to come in a number of forms and through a variety of mechanisms. This will help make the future housing finance system more resilient to economic and market events that affect particular parts of financial markets and thus impinge on the availability of funds for housing.”

Other AEI scholars, such as Peter Wallison and Alex Pollock, go a step further.  In their view, GSEs must be unwound entirely to protect taxpayers.  It’s not a question of adding some private capital to the mortgage market.  It’s a question of having a mortgage market that functions entirely on private capital without a government guarantee.  This is the only way to eliminate moral hazard that ultimately will lead to another crash.

This afternoon join AEI for a spirited panel discussion, “What should be done with Fannie and Freddie?” (May 15, 2:00pm-4:00pm, AEI 12th floor), with Mark Calabria (Cato), Robert Couch (Bipartisan Policy Center), James Parrott (Fmr. National Economic Council), David Stevens (Mortgage Bankers Association), and AEI’s Peter Wallison and Alex J. Pollock. See you there!

4 thoughts on “How to take away Fannie Mae and Freddie Mac’s nationalized monopoly

  1. “Other AEI scholars, such as Peter Wallison and Alex Pollock, go a step further. In their view, GSEs must be unwound entirely to protect taxpayers. It’s not a question of adding some private capital to the mortgage market. It’s a question of having a mortgage market that functions entirely on private capital without a government guarantee. This is the only way to eliminate moral hazard that ultimately will lead to another crash.”

    Exactly!

  2. “It would be useful for reform to allow for a diversity of sources of funding for housing, and for private capital to come in a number of forms and through a variety of mechanisms. This will help make the future housing finance system more resilient to economic and market events that affect particular parts of financial markets and thus impinge on the availability of funds for housing.”

    what’s stopping private capital now?

    • Just how much private capital would have come forward to fund mortgage loans in late ’08 through late ’11?

      Answer, probably none as residential real estate prices were declining during that time. It would not have been rational for a private investor to make a mortgage loan when the collateral is declining in value right in front of him.

      F & F served a proper role as a lender of last resort for the RE industry during that time. Without them house prices would still be declining and the recession even deeper.

      Yes, I understand that AEI and other deflationists think that would be a good idea.

  3. When was the last time the public bought a stock on the market that as guaranteed to make money? I think everyone would buy! But yet we let our banks be controlled by FF. where is the security in that. Besides, hat ver happened to the monoply law?

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