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ALG Editor’s Note: In the following featured column from the New York Post, Stephen Meister makes the case against Fannie and Freddie:
By STEPHEN B. MEISTER
How unwilling is President Obama to truly rein in the growth of government? Consider his refusal to do anything about Fannie Mae and Freddie Mac.
Oh, Obama last week — more than two years after the two mortgage giants were seized and placed into a federal conservatorship — issued “recommendations” that would supposedly wind down the twins over a decade.
Mind you, Fannie and Freddie have cost the taxpayers $160 billion in direct subsidies since they were taken over in August 2008. The country would be better off if they shut down today.
Housing finance is incredibly simple to get right: Require 20 percent down payments and make sure the borrowers have income of at least 2½ times their monthly nut, and guess what happens? Nothing — no defaults; no bubble.
That’s how housing markets work when the government stays out of them, and it’s how ours worked for the half century before the feds started twisting the arms of private lenders to make mortgage loans to the poor.
Just look at Canada. It has 20-percent-down loans and nothing like Fannie or Freddie — and its default rate is a 20th of ours.
Between Fannie, Freddie and Federal Housing Administration insurance, the taxpayers now back better than 90 percent of all new US mortgages — and none of the Fannie-Freddie $5.5 trillion mortgage portfolio is counted as part of the national debt. (Didn’t Enron’s Ken Lay get convicted for doing that?)
The housing bubble and crisis never would have occurred absent government pressure. Congress, acting through the Department of Housing and Urban Development, pushed Fannie and Freddie to buy trillions of dollars worth of subprime loans in order to make “housing more affordable.” Meanwhile, regulators bullied banks to make loans to minority borrowers who couldn’t afford to pay them back.
source: calculatedriskblog.com
There’s no doubt federal policy was the chief cause of the crisis. Prior to the end of World War II, the percentage of US home ownership ran well below 50 percent; after the war — with Veterans Administration assistance to returning GIs — we saw it climb into the low 60s. But, as the chart above shows, it didn’t skyrocket until mid-1990s, when the Clinton administration began pushing its “affordable homeownership” agenda.
In 1996, HUD set an explicit target, commanding that 42 percent of the loans bought by Fannie and Freddie be to people with incomes below the area’s median. That target rose to 50 percent before Clinton left office — and was pushed even higher in the Bush years.
Meanwhile, Washington used the Community Reinvestment Act to muscle banks into making loans to minority borrowers with poor credit ratings who put down miniscule down payments. Clinton Attorney General Janet Reno sued Chevy Chase Federal Savings Bank for not having a branch in a minority neighborhood, while the Federal Reserve refused to approve Shawmut National Corp’s acquisition of New Dartmouth Bank, citing unproven charges of racial bias in mortgage lending.
The greatest predatory mortgage lender in US history — Angelo Mozilo’s Countrywide Financial — prospered by originating vast amounts of subprime loans, then selling the junk paper to Fannie and Freddie.
Don’t believe fearmongers who say housing prices will fall off a cliff if we pull the plug on Fannie and Freddie. Washington is the problem, not the solution. If there’s one lesson we should all learn from this bubble-based recession, it’s that over the long haul the feds can’t prop up a market. Ultimately, a free market (unsubsidized) price must and will be made in housing — and it’s not far away.
Washington has no business being involved in housing finance — at all. Fannie and Freddie should be shuttered now. Their $5.5 trillion combined mortgage portfolio can and will burn off naturally as the loans are repaid and refinanced.
Housing finance should be left to the private market, and those lenders should be allowed to make loans based on sensible, colorblind underwriting criteria. If that means some folks won’t be able to buy a home that’s OK — they’ll rent.
