10.01.2008 0

Mortgage Industry Nationalized

  • On: 10/22/2008 13:40:29
  • In: Economy

  • The Federal government has now taken the bold step of seizing more than half of all mortgages in America, including around three-quarters of new home mortgages.

    As the Wall Street Journal reports:

    “Treasury Secretary Henry Paulson announced plans Sunday to take control of troubled mortgage giants Fannie Mae and Freddie Mac and replace the companies’ chief executives. The Treasury will acquire $1 billion of preferred shares in each company without providing immediate cash, and has pledged to provide as much as $200 billion to the companies as they cope with heavy losses on mortgage defaults. The Treasury’s plan puts the two companies under a conservatorship, giving management control to their regulator, the Federal Housing Finance Agency, or FHFA.”

    2008 may well go down in history as the year Big Government returned—with a vengeance. A $30 billion bailout of investment bank Bear Sterns, a $300 billion mortgage bailout, and yet another $200 billion to take over Fannie Mae and Freddie Mac. Taken together, that’s more than a half-trillion taxpayer dollars to address the mortgage crisis—without actually resolving it.

    Fannie and Freddie currently hold about $1.5 trillion in mortgages and related securities. So, even at best, Big Government’s latest doctoring is little more than a gauze pad on a gaping wound.

    Treasury Secretary Henry Paulson, the architect of this plan, acknowledges the failures of the Government Sponsored Enterprises (GSEs), Fannie and Freddie, stating the reason for the takeover was “the inherent conflict and flawed business model embedded in the GSE structure.” His plan also thankfully calls for reducing the $1.5 trillion in mortgages and securities held by the two companies to about $500 billion over the next several years.

    And that’s what’s known as a good beginning.

    Ostensibly, those mortgages would be taken over by private lenders. That’s a step in the right direction. There’s no reason these GSEs ought to control half of all mortgages, and the risk of bottling up so much debt in just two entities is obvious when one considers the real possibility that they could have dismally failed. It could become next to impossible to get a mortgage in America if Fannie and Freddie went down.

    Now that the taxpayer is on the hook, both the Federal government’s credit worthiness and the mortgage industry at large are on the line. Reportedly, the takeover is to prevent home prices from declining—one of the primary causes of the current turmoil—any further. Further declines in home values will up the ante that the American taxpayer already owes to the big bailout.

    That, of course, is an unacceptable and unsustainable position for the government to put the American people in. The housing bubble popped because of overproduction and loose lending by banks. When supply is too high and demand low, prices drop. That’s axiomatic. The fiscal health of the United States cannot be—and never should have been—dependent on artificially low interest rates, a federally-subsidized housing market, and Big Government bailouts.

    And yet, that is the position that we find ourselves in today. Which is why immediately beginning to sell off Fannie and Freddie’s holdings is in everybody’s best interests. And why completely privatizing them by selling off the rest of those holdings and getting government out of the housing market is the next step. And the only step.


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