Yay! An End to Fannie Mae!

[rowyn]

Obama Administrations Proposes Fannie Mae, Freddie Mac Phaseout

I am very happy about this, as you might expect. The FMs have long enjoyed bipartisan support in federal government, and they played a key role in the housing market boom and subsequent bust in the 2000s. It's awesome to see the Obama administration not only acknowledging that, but acknowledging that the best solution is to get rid of them. Woohoo!

Some of the alternatives offered are not a whole lot better than the FMs, alas -- option number 3 is "we'll make new FMs but guarantee their securities explicitly instead of implicitly" -- an FDIC for mortgage-backed securities. I don't think the mortage market needs federal backing to function, and giving it federal backing makes it more likely that the feds will be called in again for another rescue. I'd prefer the feds got out of the business entirely.

BUT! All of the options are better than the current system, and since reform in this area has always been a political hot potato, I'm just delighted that none of the options are 'keep on doing it exactly the way we have been but with New Improved Tighter Regulations(tm)'. I wish President Obama every success in getting the FMs out of the picture.

Comments

[terrycloth.livejournal.com]

So the main difference is that none of the firms would be very big? Or just that they'd have different names?

[rowyn]

It depends which way they go. It sounds like, in option 1, the government will guarantee only veteran's home loans and low-income loans (as opposed to owning 92% of the market as they do now.) In #2, there would be no formal gov't intervention except if the market froze. (I kinda hate this one.) In #3, you get a bunch of little FMs who are explicitly guaranteed by the feds, and who pay for that privilege.

The biggest difference is that we won't have the government swearing up and down that "The FMs are private companies and the government doesn't back their guarantees" when everybody knew that Uncle Sam would rescue the FMs if they went belly-up. Oh and look, they did. And he did.

An explicit guarantee that the feds get paid for is better than an implicit one that they don't, but the whole market acts like it exists anyway because the companies are gov't chartered and have a cozy relationship with numerous Congressmen.

[terrana.livejournal.com]

I think, to understand exactly how this helps, I would need to know who/what Fannie Mae is. Would you mind explaining it, please?

[rowyn]

Short version: Fannie Mae and Freddie Mac were originally chartered by the US federal government to create the mortgage-backed security market back in the 30s. In 1968 they were privatized. They kept mortgage rates very low, in large part because the market generally assumed that the guarantees provided by the FMs would be backed by the federal government, although officially both the US government and the FMs said this was not true. Low mortgage rates increased demand for buying housing, which led to the housing bubble. The FMs were vastly overextended and under-reserved by 2008, when the bubble was bursting. The feds at this point took conservatorship of the FMs, thereby proving that yep, the feds were going to bail out FMs if they went belly-up.

I ranted about them extensively here: http://rowyn.livejournal.com/298175.html , if you're curious about the longer version. :)

[terrana.livejournal.com]

Ooh. Interesting reading. Thank you!