The bottom line is that Fannie and Freddie are very adept at using their government status to their advantage. That is the price to be paid when government is allowed to incorporate a business.
Lastly, the federal government should unload Fannie and Freddie because they are bailout prone. They have been allowed to play fast and loose with taxpayer money and now face insolvency. Combined, both institutions own, or have guaranteed, $5.1 trillion in mortgage debt. This number is more than half the national debt of $9.5 trillion. The figure represents more than half of all mortgage debt in the U.S. With the current subprime crisis, it seems just a matter of time before one or both of these mortgage banks will face liquidity problems. But, according to Ben Bernanke, neither bank is in danger of failure. But how does he know that for sure? No one has ventured any guesses as to when the current credit crunch will be at its bottom. If neither bank is in any danger, then why has there been a government bailout plan developed that includes even more extended lines of credit and gives authority to the government to buy shares in each company? With $5.1 trillion in mortgage backed securities, even a small percentage of write downs will amount to a lot of money. As inflation continues to soar, a Fed bailout will benefit Fannie and Freddie’s stockholders at the expense of the rest of us. How just is this?
What should be done? I have a suggestion that I am sure will go over well. All the politicians and their corporate buddies who love Fannie and Freddie so much should pool their resources and purchase the institutions. They could set up a truly private firm by selling stock and playing by the same rules as their competitors. Certainly, with so many valuable assets in the control of politicians, selling stock in the new companies will be no problem. Better yet, the federal government will be out of the mortgage game and the American taxpayer will be liberated from the conflicts of interest, violations of the Constitution, and bailouts.
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Article comments
1 - bliffle
Yes, there are severe flaws in FNMA, etc., that can be traced out in their history (though one might justifiably take exception to your blanket condemnation on Strict Madisonian grounds, as so many have in the last 200 years), but that's not going to help the immediate problems or provide a cue for future improvements in methods.
It's just not reasonable or even possible to eliminate joint public/private projects entirely.
In the USA the principle of public/private joint ventures has a pretty successful history and accounts for a large part of our development and wealth, such as railroads, canals, airlines, cities, etc. Both the public and private companies have initiated and supported such joint ventures with enthusiasm which has been reinforced by successes and plagued by failures, just like most human enterprises.
What we need in the future is proper administration, management and regulation. The stakeholders have to have visibility into operations and a say over policy. And we have to institute and maintain some guidelines and rules-of-thumb.
Most importantly, people have to go to jail for illegal activities associated with these projects. And to do that we must rectify our own views of justice. Right now there are two execs of Bear Stearns, who are indicted, whose defense is that it was perfectly OK for them to panic sell their own stock while they continued to tell clients to buy.
2 - bliffle
Besides, who the heck could afford to buy either of them?
This reflects the error of allowing any organization to become huge and unmanageable. We should cut them down to size long before that can happen. They should be broken up into more manageable pieces.
3 - Cannonshop
"...Most importantly, people have to go to jail for illegal activities associated with these projects. And to do that we must rectify our own views of justice. Right now there are two execs of Bear Stearns, who are indicted, whose defense is that it was perfectly OK for them to panic sell their own stock while they continued to tell clients to buy."
Wow, blittle, you said something I AGREE WITH...at least "Mostly" agree with. Most americans of any political stripe would agree, I think, that these and other fraudsters should be facing (to borrow a term from the movie "office space") "Federal F--- you up the Ass prison"-a chance to share cell-space with Crips, Bloods, skinheads, and other violent subhuman scum, just like ordinary fraudsters that AREN'T multimillionaire brokers.
As for the actual article- FNMA and Freddymac were originally temporary-much like most of the depression-era alphabet agencies, they were intended to be a short-term fix, not a long-term institution, it's that whole 'continuing on beyond the point of being a useful tool' thing that has created this mess, and like a LOT of what eats our taxes to fill the bellies of the nonproductives in D.C., it should have ended decades ago-long before the agencies got so big they were no longer manageable.
4 - baritone
Doing any major tampering with Freddie and Fannie is a delicate if not dangerous undertaking. The two institutions have become monsters, but so much of the mortgage lending industry is intertwined with them that any wholesale changes could have a disastrous effect.
If either were allowed to fail, the residential mortgage business would come to a screeching halt. Fannie and Freddie hold the paper on a huge amount of mortgage debt. As noted around half of all residential mortgage debt is held by F&F They buy and sell multi-million dollar packages of mortgage loans everyday. Virtually anyone here who owns one or more homes secured by a mortgage have been or remain under some level of control of Fannie or Freddie. The failure of either or both would result in chaos in the industry that would surely have serious adverse effects on homeowners.
Fannie and Freddie have had the effect of creating and enforcing lending standards which are used throughout the industry. As a residential appraiser I am obliged to follow strict guidelines in the process which extend further the rules set by the Uniform Standards of Appraisal Practice(USPAP.)
Whether one likes government involvement in such matters (and, clearly, most who post here don't) should the government abandon Fannie and Freddie, we could be in for a world of shit.
And remember, although HUD and the VA represent a somewhat different kettle of fish, FHA and VA loans sponsored by the government have made it possible for a large number of people to purchase homes who otherwise could not.
B-tone
5 - Ruvy
I understand Baritone's point of view, having once been a homeowner myself in the States. So, let's examine how a system might run without Freddie and Fannie around.
You poor suckers! Guess what country I'm talking about. Israel!!
In Israel, in addition to having to put down at least 10% of the purchase price of the house/apartment, you have to buy a life insurance policy, that you pay for that names the mortgage bank as beneficiary. I'm not going to mention all the fees and taxes and byzantine negotiating that goes on because that is a product of the culture here, and would not be relevant to American mortgage baning with a sold out Freddie and Fannie watching only their own swollen butts.
But in essence, the mortgage banks would have no place to dump the mortgage. So they are going to come after you like junkyard dogs if you don't cough up your monthly fees.
Doncha just love capitalism, folks?