Just as President Obama announced his plans to appoint a former Fannie Mae lobbyist as his head of the National Security Agency, the government confirmed disappointing but sadly unsurprising news about Fannie and its sibling, Freddie Mac.
The two “government secured entities” — aka mortgage industry giants — were taken into conservatorship by the federal government in late 2008 and now need another massive bailout from taxpayers. The only question is how big that bailout will be. Depending on which of three different economic scenarios materializes — “early recovery,” “current baseline” or “deeper second recession” — the Federal Housing Finance Agency projects that Fannie and Freddie will need $73 billion to $215 billion, in addition to the $148 billion they have already received from the government. Under the worst scenario, the total bailout of Fannie and Freddie will exceed the cost of the Afghanistan War to date.
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Fannie and Freddie played a key role in creating the recent economic crisis. Massive inflation in home values during the last decade occurred because of loose lending standards, which had been explicitly approved by presidents and Congresses of both parties, who hoped to increase the homeownership rate regardless of the consequences. Millions of borrowers received ludicrously large home loans and lines of credit that they had no hope of repaying. The poor bought rich, the rich bought richer, and lenders underwrote their ill-advised loans with the encouragement and financial backing of Fannie and Freddie, thanks to poor decisions by policymakers. Then Fannie and Freddie bundled these bad mortgages into securities that spread through the financial system like a metastasizing cancer
That’s why it is intensely distressing to hear Treasury Secretary Timothy Geithner perpetuate the myth that government, having inflated and propped up the housing market, can now heal it, as he suggested during an August meeting with bankers and economists. Fannie and Freddie failed because they based their lending standards on political rather than sound business considerations, thus distorting, inflating and deflating the housing market and creating a hazard to all other economic activity.
By now Congress should have learned its lesson: It’s long past time to get politics out of homeownership. Fannie and Freddie should be phased out of existence and their assets sold at whatever price they can fetch. In the future, hungry entrepreneurs, not unwitting taxpayers, should be the ones risking money in the mortgage market. As long as there is money to be made in housing, private mortgage underwriters will take that risk, and they will not let political considerations interfere with their lending standards. That is the best guarantee of a healthy housing mortgage and a recovering national economy.
