Bulldozing the American Dream

It’s time to kick Fannie Mae and Freddie Mac out of the housing market

Taxpayers have already spent more than $111 billion bailing out mortgage giants Freddie Mac and Fannie Mae, and that's going to be just the tip of the iceberg. Instead of limiting Fannie's and Freddie's bailouts to $400 billion as first planned, the Treasury quietly announced (on Christmas Eve, no less) that it would offer the two firms unlimited bailouts. This puts taxpayers on the hook for any losses the two firms suffer. And there will be lots of losses.

Last week, Fannie announced it lost $15.3 billion in just the fourth quarter of 2009, bringing its 2009 losses to $74.4 billion. The Congressional Budget Office expects Fannie and Freddie to cost taxpayers a whopping $290 billion this year alone. Collectively, the two firms hold or guarantee more than $5 trillion in debt. In December, 3.8 percent of Freddie's mortgages were at least 90 days late and 5.2 percent of Fannie's mortgages were delinquent. Those numbers will continue to rise as the economy rights itself.

Since their founding, Fannie and Freddie have been used by politicians to distort the housing industry. They were technically privatized but had a tacit promise that the government (read taxpayers) would pick up any major financial losses. Fannie and Freddie used this silent guarantee to borrow against the credit of the U.S. government. At one point, they were leveraged as high as 100-to-1 by some estimates. And you thought AIG was bad.

Congress manipulated the mortgage market, and helped the housing bubble, by pursuing a political goal: home loans for everyone. When it comes to congressional exploitation of the housing market, few could be considered more culpable than Rep. Barney Frank, Massachusetts Democrat. For the past two decades, Frank and others have encouraged Fannie and Freddie to lend to risky borrowers who did not meet traditional requirements. As recently as last summer, Frank wrote a letter demanding that Fannie and Freddie further reduce loan-qualifying standards for condo buyers. This excessive risk-taking gave more families access to homeownership, a political boon. Unfortunately, it also meant a massive buildup of subprime debt.

At a hearing in February, Frank changed his tune, calling for "abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance."

He's half-right. The answer is to abolish Fannie and Freddie. But the government should stop there. We don't need a "whole new system of housing finance." The federal government doesn't need to be involved in the mortgage business at all. Plenty of healthy, viable banks are willing to do that.

The central role that Fannie Mae and Freddie Mac played in the financial crisis shouldn't be ignored. Without the lowered lending standards at Fannie and Freddie, mortgage originators would have paid more attention to the loans they were issuing, because the risk wouldn't have been shifted onto taxpayers so easily. And without the failure of Fannie and Freddie in September 2008, the market might not have destabilized, leading to the bankruptcy of Lehman Brothers, the quasi-nationalization of AIG and, eventually, the bailout of the financial industry.

The process of eliminating Fannie and Freddie is going to be complicated and hotly debated. They cannot be shut down right now because virtually the entire mortgage market is dependent on them as a wastebasket for toxic mortgage debt. But a long-term strategy for dissolving Fannie Mae and Freddie Mac can and should be created now. The ideal plan would break them up and sell their assets over five to 10 years, with any remaining government activities related to housing consolidated in another agency.

Fannie and Freddie have hurt the economy and distorted the housing market long enough. As the losses pile up, it is time for the government to start getting itself out of the mortgage business.

Anthony Randazzo is Director of Economic Research at Reason Foundation. This article originally appeared in The Washington Times.

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  • robc||

    They cannot be shut down right now because virtually the entire mortgage market is dependent on them as a wastebasket for toxic mortgage debt.

    That sentence makes no sense. That is a reason TO shut them down, not a reason they cant be shut down.

  • Some Guy||

    That's like saying you can't arrest a serial killer, because how else would people get their throats slashed?

  • AJs||

    It's sort of like a junkie situation... if you quit teh herion cold turkey it could be disaster. It should have been choice A early on to just quit and not look back, but given our current poor health and level of addiction, it quite literally could be fatal.

  • Some Guy||

    I'm not saying that price discovery would be painless, but it would help about as many people as it hurt.

    And that's before you take future generations into account.

    But tell me this: if taking the government completely out of the housing market would make prices drop another 30%, why would you say that is a bad thing?

  • AJs||

    I don't think housing prices dropping is a bad thing. However I think you underestimate how inflated the prices are even today as a result of Fannie/Freddie - and partially because they have killed all competition. If somehow Congress waived its magic wand and Fannie/Freddie and the other GSEs close permanently for business tomorrow, the values wouldn't drop 30%... they would disappear all together causing full collapse.

  • Some Guy||

    I would be fine with a 90% drop, and I own a house. But that wouldn't happen.

    There would be a liquidity problem for a few years and an overcorrection to maybe 50-60% as we worked through the massive wave of foreclosures that made the previous ones look tame. In my fantasy world many banks would fail, because we wouldn't bail them out, and we'd still be stuck with the GSE losses - but it's be worth it.

    Then prices would return to a reasonable multiple of equivalent rental costs, which is where I got 30% from.

  • Kroneborge||

    The problem is that in today's market, otherwise qualified buyers could probably not get a loan without the GSE's.

    The idea is to get the government out of housing WITHOUT, causing a depression. So in this case, phasing them out would be the prudent course of action.

  • robc||

    If the GSE's went away, I dont think the banks would just stop giving loans. They would require much stronger standards, but wouldnt just stop.

  • Kroneborge||

    The majority of loans are only being made because they can be underwritten by the GSE's.

    Would some loans happen without that support sure, but not nearly enough.

    I do think we need a further correction in the housing market, but not THAT much of a correction.

    My understanding is that somewhere near 90% of mortgages are being backed by the government in some way or other (fannie, freddie, or FHA).

  • Some Guy||

    Why do you think that loans that wouldn't be written without the taxpayers covering all losses should be made?

    Why is artificially overpriced housing considered an a foundation of the American dream, as opposed to say realistic affordable prices that don't require 95% LTV for an average family?

  • robc||

    What Some Guy said.

    If it cant be made without government backing it isnt being made to someone "otherwise qualified". They aint qualified if the bank isnt willing to take the risk.

  • Colonel_Angus||

    "The problem is that in today's market, otherwise qualified buyers could probably not get a loan without the GSE's."

    The fuck with them.

  • robc||

    The ideal plan would break them up and sell their assets over five to 10 years, with any remaining government activities related to housing consolidated in another agency.

    The ideal plan would pull all government guarantees TODAY and let them fail spectacularly TOMORROW.

  • ||

    Forbid them to buy up/guarantee any more loans NOW. Liquidatew the firms, no employee buyouts necessary - just clean out your desk and go. Pay a maximum of 60¢ on the dollar for mortgages they guaranteed and nobody will buy when they are liquidated.

    After liquidation, drive a wooden stake through their hearts and salt the ground from which they sprung.

    That's about the best I can envision selling to the public.

  • Some Guy||

    I know it'd be kind of a waste of taxpayer money, but I have been an advocate of burning their headquarters to the ground and sowing the land with salt.

  • AJs||

    That is a government program I could get behind!

  • ||

    Interesting how the government punishes incompetence: by granting the incompetents unlimited credit.

  • ||

    Calling to mind the Iron Law:

    You get more of what you reward, and less of what you punish.

  • SkepticalTexan||

    How heartless can you be?

    Without Fannie and Freddie, how else could an unemployed janitor buy a $400,000 condo?

  • ||

    By saving money for a long time.

  • The Gobbler||

    "Taxpayers have already spent more than $111 billion bailing out mortgage giants Freddie Mac and Fannie Mae"

    Enough to buy 1.1 million $100K homes.

  • ||

    If you throw in TARP the government has probably spent conservatively 1.5 trillion dollars as a result of the banking crisis. That would have paid off 30 million five hundred thousand dollar home mortgages. They would have been better off having a national lottery to pay off home mortgages.

  • robc||

    You are off by 1 decimal place, 30 million, 50k homes.

    Or 100 million $15,000 homes. There are roughly 100 million households in the US.

    Or, by adults, roughly 10k each.

    If every household had received a 10k voucher per adult that had to be used in the following order it would have been better than TARP:

    1. get house payments current or voluntary foreclosure (if you knew the money wouldnt help)

    2. pay down principle on mortgage or voluntary foreclosure (if you were so far under water it didnt matter)

    3. pay off other consumer debts

    4. cash (for people like my parents who have no debt at all)

    Yeah, lots of underwater homes wouldnt be helped out by 10 or 20k, but many would. And many people who were behind but could afford payments would be caught up. And many who couldnt stay caught up would be for a while pushing foreclosures off.

    Still a bad idea, but better than what they did.

  • ||

    That was my point. Virtually any crackpot scheme you can imagine from my national lottery to your voucher program would have been better than what they did.

  • robc||

    Oh, I agree. Was just correcting your math and throwing my crackpot idea out there too.

  • ||

    That was my point. Virtually any crackpot scheme you can imagine from my national lottery to your voucher program would have been better than what they did.

  • ||

    You are making a fundamental mistake. The purpose of these programs is not to help disadvantaged people or to help home owners keep their heads above water. It is not even to restore some sort of stability to economic system.

    The purpose is to advance the interests of the relative handful of people who are in a position to manipulate government policy in order to enrich themselves and their friends. It helps to think of government and virtually all government programs as a black box, the machinations of which are indecipherable to we on the outside and the purposes of which have nothing to do with the ostensible goals.

    The hundreds of billions of dollars Dubya and Obama have sunk into various sectors of the economy had nothing to do with helping the economy to recover and they have served exactly the purpose they were intended to serve.

    Imagine if all of that taxpayer money was simply returned to the taxpayers who earned it. That would have actually been a stimulus. The purpose of the bailouts were to enrich a relative handful of people and they served their purpose well.

  • ||

    Freddie and Fannie need to be terminated. There's probably some engineering to do around the edges to mitigate the impact, but that's it.

    There's going to be a big slug of bank failures (banks are actually failing now at a very high rate, and the ones failing are not being taken over by the FDIC until they are in much worse shape than they have been historically). There may be some engineering around the edges to try to mitigate that impact, as well.

    But the essential policy question needs to be, not whether the feds exit the mortgage market, but how.

  • robc||

    I seriously think "mitigating the impact" is probably a bad thing. Its a compromise Im willing to make, you know in that whole perfect/good enemies kind of way.

    However, Randazzo is suggesting 5-10 years, which is insane.

  • ||

    If we terminate fannie and freddie, the housing market would actually return to a reasonable level. The bubble would totally deflate. Long term that is a good thing. But short term a gazillion people would be under water on their mortgages the banks would finally go down and we probably really would see 20% unemployment and depression like economic conditions.

    But, the economy would come back so much better for it in the end. Of course that whole adjustment and market recover idea causes MNG to call me a "faith based".

  • robc||

    I said at time of TARP we had the option of 2 years of extreme suck or 10 years of no growth. "We" chose the no growth pass.

    [The clear,safe] path leads ever down into stagnation.

  • ||

    At this point no growth is better than what we have. It is not like we didn't have a bunch of pain anyway. This is the worst job market in my lifetime. We spent all that money and things are still horrible.

  • robc||

    I wasnt expecting the stimulus package too. :)

  • ||

    The other thing is that if the banks did implode, the people who would lose the most would probably that wealthiest 1% that the progressives like Tony and Chad are always complaining about. Sure, the economy would suck for a while, but what with deflation and the crash in housing prices, the poorer 80% of the population would stand to gain.

    This stuff strikes me as the kind of thing that directly disputes the Marxist claim that inequality always increases under capitalism. Sometimes the rich do lose a shitload of money - except ironically, the socialists decide to step in a bail them out - so they can have more power to control the economy. If you let the collapse happen, you get the kind of economic churn that they claim doesn't happen.

  • ||

    You are right Hazel. Government creates inequality at the same time that it destroys wealth.

    What I wonder is how many collectivists understand this and want this and how many actually believe government can provide their grey utopian world?

  • ||

    Yes. It's not a coincidence that under actually existing socialism, the politically connected had access to all kinds of luxuries unavailable at any price to the general public.

    In practice, socialism is not about equality, but about political influence. Even in our social-democratic welfare state, the interest groups who are the most politically organized get the most money from the state (see AARP). But that has also bred the group-identity politics that has been so destructive to civil society. By forcing people to organize as identity groups to compete for political favors, the welfare state undermines trust at the lowest level. People start seeing other members of society as belonging to in-groups or out-groups.

  • Chad||

    Yes, which is why medium-government America has much worse (and worsening) income equality than those evil welfare states of Europe.

    It wasn't "too big to fail" that prevented bankers from "losing shitloads". Note that the former execs of companies that *weren't* bailed out were still filthy stinking rich after their companies collapsed, and then just moved on to other jobs where they could get even filthier and stinkier. What DID prevent them from being paupers (which, excepting guillotines on Wall Street, would be the best form of justice)? Weak boards, inappropriate pay packages, and overly complex finances which made investors dependant on ratings agencies who had perverse incentives. And guess what? All this crap is (duh duh duh) a market failure, called agency. Yet again, your myth is shattered by reality, but you just can't admit it.

  • K-Y||

    What does "worse income equality" mean?

  • Chad||

    I mean two things by it.

    1: The fraction of income kept by the top 1, 5, and 10% is growing, and the fraction kept by the bottom quintiles shrinking.

    2: People are becoming *less* likely to move from the quintiles they were born in. In other words, if your daddy was poor, not only are you more likely to be poor as well, but you are more likely to be poor than someone like you but born in the 60s.

  • ||

    Clearly the answer is a more progressive tax system! Taxing people more as they work their way up is sure to help them move up!

    Oh wait except it's accomplished the opposite.. hmm.

  • Jimmy 'Crack' Corn||

    Please allow me to withdraw all of my money from the banks before you implement these policies.

  • AJs||

    The problem is that free market solutions do not provide results right this minute... and when you have votes to win in an election, it's easier to sell the magic blue pill... who cares if it works, it's blue! It does SOMETHING for you!

  • Chinny Chin Chin||

    Low priced luxury housing is a human right.

    $290 billion is a small price to pay for our freedom and dignity.

  • ||

    You can have my dignity for half of that $290 billion. At that price I'll keep my freedom. Besides, with $145 billion, I probably won't need to sell that freedom anyway.

  • rau||

    off topic but check out this brilliant piece of scholarship from psychology today on the tea party movement.

    http://www.psychologytoday.com/node/39146

  • ||

    I hate these folks but I also understand them.

    The former is obvious, the latter is patently false from the article.

  • Michael||

    As Mark Twain quoted from a wise old woman, "You show me where a man gets his cornpone and I'll tell you what his 'pinions is".
    The writer of the Psych Today's article's Bio indicates his clinic is doing extensive work with Andy Stern's SEIU.

  • HeadTater||

    Ok, if the political sissies are afraid of shutting down Freddie Mac and Fannie Mae right out, just refuse to let them accepting new business.

    Or we could do what we should and just pull the plug.

  • ||

    The large banks that Anthony Randazzo likes are no less government backed than Fannie/Freddie. Let's not pretend that the Fannie/Freddie corruption is a small blot on an otherwise pure free market system. The system is rotten to the core.

  • Kroneborge||

    This is true. All of the other banks that are "to big to fail" should also be split up into pieces that are small enough to fail.

    There shouldn't be any single finanial institution large enough to wreck the whole economy.

  • robc||

    Just let the big ones fail. No bank is too big to fail. Also, no country.

  • Tman||

    The most upsetting part of this is that as long as the Dems control Fannie and Freddie, and people like Maxine "I better not see my consituents ARM's adjust" Waters running things like the finance committee, none of this is going to change.

  • Byron||

    Uh, Maxine...what does the "A" stand for again???

  • ||

    1. Shut off new business
    2. Form RTC-like receiver responsible for asset disposal
    3. Get liquidatin'

    As a practical matter it would take a few years (as with the S&Ls;), but as long as the feds are exiting the business I'm ok waiting that long.

  • ||

    Caption:

    "And then the doctor said 'Good news... we got the spider out of your ear. But it was a female. And it laid eggs!'"

  • Freeranger||

    Sure, get rid of Fannie and Freddie.

    While we're at it, get rid of the mortgage interest deduction, a gigantic distortion of the housing market and subsidy to existing homeowners. It doesn't help new buyers since the value of the deduction is simply capitalized into home values.

  • robc||

    Sure, no problem. The amount it saves me is WAY less than my share of the eventual F&F bailout.

  • Kroneborge||

    Even better, just move to the Fair Tax.

  • ||

    Agreed.

    And yall just shut up any taxes being bad taxes. Fairtax is a step in the right direction, and it takes some of the power out of congress hence the attraction of corrupting influences.

  • robc||

    Pass a constitutional amendment nullifying the 16th FIRST and then I will get on board with you.

  • ||

    It won't happen because of the Progressive administraion we have now. Booting Fannie & Freddie out, along with the Post Office, and Dept. of Education would be a great start to getting this country back to fiscal responsibility.

  • ||

    Fannie and Freddie should be wound down or liquidated. But there's no chance in hell it will happen. The GSEs operated as very risky and very profitable sinecures for well connected members of the political class distributing what effectively amounts to free cookies to generate a political support. So, you create a popular program that enriches your political allies. How many politicians do you think are going to kill the goose that lays THAT golden egg? Mark my words, not only will the GSEs remain when all is said and done, there will be still more such monstrosities.

  • ||

    To fix the housing mess housing values have to go back to where they were in 2001.How do you tell people their house is not worth what they paid for it.Greenspan lowered intrest rates to stimulate housing after the DOT COM bubble broke,because there was nothing else out there.

  • ||

    With housing starts still at record lows and new home buying drastically lower than where we need to be to get back to close to even this really isnt all that unfeasible and bad of an idea. I read a dissertation about the bulldozing projects here and some very valid and sad realities have come to light of the whole bubble economy.

  • abercrombie milano||

    I like that saying, thanks!
    Thanks for posting this. Very nice recap of some of the key points in my talk. I hope you and your readers find it useful! Thanks again

  • ||

    Lol! What kind of idiot wouldn't get anything other than a house for 400 grand, in terms of housing? ;)

  • ||

    thank youUGG Kensington

  • ห้องน้ำ||

    The process of eliminating Fannie and Freddie is going to be complicated and hotly debated. They cannot be shut down right now because virtually the entire mortgage market is dependent on them as a wastebasket for toxic mortgage debt.

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