Is it time to dump Fannie and Freddie?

Posted by  on Dec 13, 2010

One huge reason for getting rid of the two government-sponsored enterprises, or GSEs, is the dominance they have in the American mortgage market today. They securitize over 60 percent of the market. Throw in the "real" government financing, including FHA, VA and USDA mortgage lenders, and only about 10 percent of mortgage lending comes government-free.

Taxpayers on the hook

Government mortgage lending effectively means taxpayer mortgage lending. One more crisis of confidence in the real estate markets in this country could take down more than banks -- American citizens all have skin in this game as it stands. And how long will the U.S.A. be "too big to fail?"

Is there an exit?

So, how about just putting the GSEs out of business, effective immediately, and letting private mortgage lenders step in? If there's enough profit on the table, someone will grab it, right? Someone will, but until that happens could the American housing market survive a 60-percent reduction in available financing? And what happens when private enterprise takes over? What kind of mortgage rates will investors demand to finance mortgage lending in today's shaky economic climate? It's a safe bet that they'd be higher than what's available today.

What will a mostly private mortgage lending market do to real estate?

Without the implicit guarantee of government backing, investors will assuredly demand higher returns, meaning current mortgage rates will increase, meaning housing will be less affordable unless prices drop even further. And until the private market has been successfully regulated, restoring confidence for those who might invest in private mortgage-backed securities, private money for residential financing may be in very short supply.

Let them down easy

So, while we might want to break up with Fannie Mae and Freddie Mac, we may have to slowly move to an increasingly private mortgage financing system and proceed gently. Guy Cecala, publisher of Inside Mortgage Finance, put it this way: "The only thing you can do now is small, incremental changes that will get you where you want to be in five or ten years." In other words, a sudden breakup would be disastrous, but eventually Americans could be free to date other mortgage companies.


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