A Darker Outlook at Fannie and Freddie
Shareholders of Fannie Mae and Freddie Mac, the big government-backed mortgage companies, were hammered anew last week, as the companies reported worse-than-expected quarterly results and warned of more pain to come. For all the distress, no one should be surprised that shareholder value has been destroyed.
At Fannie and Freddie, as at other financial firms, highly paid executives stoked profits during the housing bubble by piling into loans and mortgage-backed securities that were bound to tank — unless house prices rose forever and the economy never soured. Their higher quality assets, being mortgage related, also made them vulnerable to a housing downturn. In addition, the companies have been poorly supervised — by lawmakers who put a higher value on campaign contributions than on their duties, and by federal regulators who failed to stop the bad lending that fed the bubble.
The question now is whether taxpayers will have to bail out the companies and, if so, whether the government is committed to protecting taxpayers’ interests.
I decided to read the comments to this one. It was weird because the 'Read all comments' link bounced me to the NY Times front page. I had to hit the "Post a comment' link and scroll up.
Everyone is annoyed. Lots of finger-pointing and blaming...and I can't argue against any of them. Everyone gets screwed here. My real feeling is we're in for a "New Deal" sized economic reorientation.
But assuming you want to salvage as much of the financial infrastructure as possible, the minimum regulatory change that will do it is to require mortgage originators to keep mortgages on their own books for five years before reselling it to Fannie Mae or Freddie Mac.
Fannie Mae and Freddie Mac's entire purpose is to free up mortgage originators' money so they can make more loans. But the faster you do that the more risk you shift from the lenders to the quasi-governmental institutions and hence to the taxpayers. As things stand, they only have a month or two of exposure to a 20-30 year risk. The number of defaults in mortgages that are paid up through the first five years is vanishingly small. That, I think, is an acceptable level of risk for a quasi-governmental institution to assume on my behalf.
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I tend to believe requiring
I tend to believe requiring lenders to hold mortgages five years before selling them would have the effect of tightening credit -- a bad thing for prospective homebuyers. Besides, the GSEs have the cash reserves (unlike many of the financial houses who waded into the CDO market).
Because this credit crisis is mostly about investor confidence (or lack thereof), I don't believe additional regulation beyond what is outlined in the Housing and Recovery Act of 2008 is necessary. Congress, the President, the Fed, and the GSEs should next encourage private lenders to develop new mortgage vehicles while re-financing some of the existing subprime notes.
I tend to believe requiring
I wouldn't require it. Let some non-governmental, absolutely unguaranteed by the Feds organization repackage and sell mortgages backed securities if they want. The restriction should be placed on Fannie and Freddie. If there's a need and the free marketers are correct, some strictly private mechanism for doing the same thing will arise.
More for home sellers and builders, I should think. People will still need to live somewhere...the price of housing would not be able to inflate wildly under the conditions I suggest.
As long as the mortgage originators don't get to sell their risk, fine. Freddie Mac and Fannie Mae should not be allowed to acquire mortgages less than five years old, nor purchase mortgage backed securities with components less than five years old.