Fannie Mae, Freddie Mac Future Is Assured By Congress.
Perhaps it shouldn't be when you consider Fannie and Freddie have a good chance of costing taxpayers more than the bailouts of the banks (-$7 b.), AIG ($36 b.), and GM and Chrysler ($34 b.) put together according to this Congressional Budget Office analysis of last month. In December, CBO estimated Treasury will end up spending $163 b. of taxpayer money to keep Fannie Mae and Freddie Mac afloat, and Treasury's Christmas Eve lifting of the $200 b. caps on what it can put into each gave me cause to believe the ultimate cost could be a lot larger. It all depends on a housing market rebound that hasn't happened yet.
Today, the House Financial Services Committee held a hearing on the future of Fannie Mae and Freddie Mac. Treasury Secretary Tim Geithner said:
"at the heart of this debate will be to think about what is the appropriate role for the government in providing some form of guarantees to assure a more stable flow of housing finance and what role should the private markets face."
He concluded: "You [Rep. Mike Castle (R-DE)] ended by asking is, is it possible to advocate a system in which the government plays no role in providing support for mortgage finance market through explicit guarantees, subsidies, support for liquidity.
And I think there is a -- there is a -- certainly a pure theoretical option in which they may make sense, but my own view is there's probably going to be a good economic case, good public policy case for some continued provision of a carefully designed guarantee by the public sector going forward.
Because housing markets are so critical to overall economic activity, they play such a large role in people's wealth, the perception of wealth, they are very vulnerable to volatility when you see -- when you experience broader financial market shocks to the financial system.
And because of that unique role housing markets play, I think there's likely to be a good public policy case, good economic case likely that both conservatives and liberals could agree on, where they design a carefully calibrated guarantee, appropriately priced, that would continue in some form."
This debate also took some interesting turns on CNBC, where Larry Kudlow placed blame on Republicans and Democrats alike for refusing to lift government housing guarantees. I agree with Kudlow that despite the moral hazard most economists see inherent in Fannie Mae and Freddie Mac, Congress will never leave homeownership to the market.
Bookmark/Search this post with
Getting cause and effect backwards
"And because of that unique role housing markets play, I think there's likely to be a good public policy case, good economic case likely that both conservatives and liberals could agree on, where they design a carefully calibrated guarantee, appropriately priced, that would continue in some form."
Isn't it because of the guarantees, outright and implicit, and the tax subsidies for housing that housing's role is unique. Remove the government's involvement and housing becomes just another US sector.
I thought the CBO's estimate
I thought the CBO's estimate for the total cost was $389bn (lower than the Amherst estimate, which is closer to $500bn)?
GSE subsidy cost
$389 b. is CBO's FY09-FY19 estimated cost of federal GSE subsidies as shown in Table 2.
The issue is more complex than conservatives and liberals think
Consider two points:
1. Prior to the creation of the GSEs during the Great Depression, there was no such thing as the mortgage market. The majority of Americans simply did not own their homes, they rented. Most of those who owned homes paid cash (often with family assistance). The few who borrowed in those days generally did not borrow from banks, they borrowed from insurance companies and other non-bank financial institutions. The loans were generally structured as 3-5 year balloon loans, which meant the borrower was perpetually in debt. Land contracts were more common than mortgages (thus the deed remained with the lender). When the Great Depression hit, financing dried up, and faced with balloon loans that couldn't be rolled over and land contracts that did not provide for formal foreclosure/eviction proceedings, people were simply tossed out on the street.
2. Attempts to increase the availability and affordability of credit are very likely to drive up the prices of the assets which are purchased with that credit. While this is favorable to the few who get into the market early, the overall long term effect in this case is to make house prices LESS affordable.
I would encourage any policy maker thinking about either tearing down the GSEs entirely in order to return to a "free market" OR attempting to return to the status quo of the GSEs prior to the financial crisis to consider both of the above points.
Let them fall
And create in the void a government only entity that will only buy mortgages that conform to good standards. The agencies have been abused by Bush and now Obama to bail out wealthy banksters who made bad business decisions.
F&F
Didn't F&F absorb some of the crap assets from private sector institutions?
GSE's = Fail
I say scrap GSE's totally. I feel that if they continue to exsist, so will our financial crisis. GSE's have ridiculous leverage ratios that create too much layering. I know it helps create lending which causes economic expansion, but it seems to me that the expansion is artificial.
I agree with you "Letthemfail," but dont forget that this has been going on long before Bush and Obama.