By Bill Wilson
On Tuesday, the Obama Administration will be hosting a conference of real estate, banking, and mortgage industry leaders to begin to determine what to do with the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac.
These, you will recall, are the $5.5 trillion mortgage giants who, with the help of the Federal Housing Administration (FHA), the Department of Housing and Urban Development (HUD), and the Federal Reserve, facilitated the catastrophic housing bubble that has left the U.S. economy lost at sea.
Specifically, it was HUD that imposed so-called “affordable housing goals” on Fannie and Freddie, which rose from 30 percent in 1993 to 56 percent by 2008. Also, the FHA helped to weaken lending standards, expanding government-held loans with down payments of 3 percent or less from $7 billion 1991 to over $174 billion in 2007, $160 billion of which were held by the GSEs. The Federal Reserve provided the capital needed to fuel the bubble.
According to research by former chief credit officer of Fannie Mae and mortgage industry consultant Edward Pinto, Fannie and Freddie held $1.835 trillion in higher-risk mortgages and mortgage-backed securities by 2008: $1.646 trillion, were GSE-issued mortgage-backed securities, and $189 billion of subprime and Alt-A private mortgage-backed securities, Also, because of the implicit backing of taxpayers, Pinto notes that the GSE-issued securities were automatically granted AAA bond ratings, and the GSEs were even able to misrepresent the quality of mortgages that underlined those securities.
As if that was not bad enough, Fannie and Freddie crafted a marketing plan that promised a higher rate of return than treasuries, but with the same risk associated with a taxpayer guarantee.
It was that implicit guarantee that enabled the GSEs to sell some $4.7 trillion of mortgage-backed securities, $1.5 trillion of which were sold overseas to investors, as reported by the New York Times. As more securities were sold, Fannie and Freddie bought more mortgages and bundled them into securities. As a direct result, Fannie and Freddie were able to acquire about half of all mortgages as of July 2008.
The rest is history. Now, the housing bubble has popped, Fannie and Freddie (and thus all housing finance) have been nationalized, securities are still unsellable, and the crisis has been papered over with $150 billion from taxpayers to the GSEs and another $1.25 trillion from the Federal Reserve to purchase a large swath of mortgage-backed securities from Fannie and Freddie. All that to put a floor under prices which plummeted anyway.
Not to mention the Great Recession that has ensued, with stagnant 9.5 percent unemployment, decelerating 2.4 percent growth, $4.3 trillion in new national debt since 2007, and the foreclosures are still coming in waves. And, no recovery as promised. “We’re not going to see meaningful, sustainable home price appreciation while we’re seeing 75 percent of the markets have increases in foreclosures,” RealtyTrac senior vice president Rick Sharga recently told Reuters. Making matters worse, the resultant economic downturn is now placing pressure on prime borrowers, whose rates of default are now increasing.
All this misery has been caused by unlimited government financing, expansive loose lending on the low-income side of the spectrum, easy money from the Federal Reserve, and the implicit guarantee by the federal government of the almost the entire market for housing. The irony, of course, is that the goal of “affordable housing” was not achieved as prices soared during the housing bubble. Prices have only begun to come down to affordable levels after the government-induced mania has worn off.
One might think all this would be enough to scare the government away from any further interventionism into housing finance. These distortions are too catastrophic, after all. Such a rational conclusion would lead to a government exit of housing, an end to federal guarantees, the repeal of the “affordable housing goals,” and the elimination of Fannie and Freddie.
Certainly, taxpayers and voters are all shell-shocked from bad economic news — all a result of the housing crisis government caused. So, now is a golden opportunity to close this chapter of bureaucratic mismanagement that has cost the nation trillions of dollars.
Alas, the Obama Administration may be prepared, starting Tuesday, to basically institutionalize this calamitous system. According the Michael Barr, the Treasury Department’s assistant secretary for financial institutions, “If we decide we want to subsidize the housing sector we are going to need to decide to do that explicitly, and people are going to have to pay for it. I think that would be a fundamental change.” Both the Mortgage Bankers Association and Bank of America are pushing for an explicit guarantee of mortgage-backed securities, too, according to the Wall Street Journal.
And, reports the Journal, community groups and state agencies, including the National Council of State Housing Agencies, want the “affordable housing goals” to continue. Apparently, these various special interests must believe that they have been so effective at rewriting history that nobody will notice that nothing has changed.
So, the government has learned nothing from this episode. In a constant short-term crisis management situation, there is seemingly no effort at all to come to grips with the fundamental problems that caused the crisis. Instead, government still wants to reignite the housing bubble, despite the fact that the trillions of dollars that have been poured into this crisis have not propped up home prices at all.
There is another way. Fannie and Freddie need to be closed down permanently, and housing finance taken care of the by the private sector from now on. Yes, prices would fall. But that’s not the end of the world. After all, what’s more expensive: the additional trillions of dollars it will take to reinflate the housing bubble, or the estimated $800 billion of negative equity that is out there? There’s no comparison.
Let the markets find the value of these homes at a lower level, and then the market will begin again. It’s time to let the chips fall where they may.
Bill Wilson is the President of Americans for Limited Government.
