Reason Writers Around Town: Jesse Kline in the National Post on Fannie Mae and Freddie Mac

Last week, a Congressional subcommittee approved a series of bills designed to wind down Fannie Mae and Freddie Mac, the mortgage giants that were taken over by the Treasury Department three years ago. In Canada's National Post, Reason intern Jesse Kline writes about the lessons that Canada can learn from the effects of government intervention in the housing market:

Three years after the global financial crisis started, due in large part to troubles in the U.S. housing market, the American government is just now beginning to address the issue of Fannie Mae and Freddie Mac, the government sponsored enterprises that helped fuel the housing crisis.

By purchasing and insuring risky mortgages, backed by an implicit guarantee from the federal government, Fannie and Freddie created perverse incentives for mortgage originators to give out bad loans. A new study by Anthony Randazzo at the Reason Foundation found that these guarantees always underprice risk, drive mortgage investment into unsafe markets and inflate housing prices by distorting the allocation of capital -all of which eventually created a U.S. housing bubble that burst in the lead-up to the 2008 financial crisis.

When the bubble burst, the mortgage giants were taken over by the federal government, and have since been suckling on the taxpayer's teat to the tune of $154-billion and counting. As a result, even the Obama administration has come out in favour of reducing the government's role in the housing industry.

A similar situation in Canada would put a significant strain on the treasury, because the Canadian government explicitly guarantees a significant portion of outstanding mortgages through the Canada Mortgage and Housing Corporation (CMHC), the crown corporation that insures and securitizes mortgages.

Read all about it here.

More from Reason on Fannie and Freddie here.

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  • Taxpayer's Teat||

    I am so fucking raw right now.

  • ||

    CMHC is completely different, it is government insurance, not government mortgages. It adds cost to a mortgage as well. CDN housing market is fine.

    In my case I scraped extra down-payment together to avoid mandatory CMHC

  • ||

    I understand Canada also has clawback on other assets.

    In other words, if you default on a mortgage your other assets can be seized.

  • Bradley||

    Sure, keep telling yourself that.

    Signs point to a severe housing correction in Canada
    The CHMC: Canada's mortgage monster

    Our central bankers are wise! Our government's ginning up of the housing market is safe! It could never happen here!

  • MNG||

    Libertarians don't want any protections for renters in dealing with landlords and they don't want any assistance in making more renters owners. You might think housing policy in Libertopia would be maps to bridges people could sleep under, but of course public bridges would not exist.

  • Id||

    Who peed in your cornflakes this morning?

  • ||


    (Numerous poor and elderly were harmed in the making of this comment.)

  • Night Elf Mohawk||

    What protection beyond enforcement of the rental agreement do you think renters should have?

  • Xmas||

    I believe MNG wants British Squatters Rights...

  • Rich||

    a Congressional subcommittee approved a series of bills designed to wind down Fannie Mae and Freddie Mac

    "A series of bills"? With all due respect, how about just something like "As of January 1, 2012 Fannie Mae and Freddie Mac are dissolved"?

  • ||

    Because the US guaranteed the debt of FNM/FRE many years ago. That would be tantamount to a Treasury default.

  • Rich||

    Oh. Well, we can't have *that*!

  • T||

    You can guarantee the debt of the organization while dissolving the organization, shrike. Debt can be moved around just like assets. How the fuck do you think we got into this?

  • Joh[nn]y Lo[n]gtorso||

    Shut up, it's not a Golden Girls link:

    The Cause of the 2008 Mortgage Crash

  • Joh[nn]y Lo[n]gtorso||

    ...It appears that this aggressive expansion of Fannie Mae and Freddie Mac into subprime lending was a political strategy adopted by their leaders in response to heightened congressional scrutiny and criticism in the wake of the accounting scandals at the agencies that emerged during 2003 to 2004 and which threatened to lead to a revocation of their favored status as government-sponsored enterprises. Fannie and Freddie aggressively restyled their lending operations as the promotion of affordable housing and actively encouraged retail lenders to generate mortgages with those characteristics. As a result, not only did the number of subprime loans explode in the 2005 to 2007 period, but a disproportionate number of these loans were made to the riskiest borrowers or had extremely high risk characteristics, such as negative amortization, interest-only, high-LTV, or very low FICO scores....

  • ||

    Better late than never? I'm still confused why anyone thought it was a good idea to take risk out of the housing market. No risk = no responsibility.

  • Hal (GT)||

    Good article. I only wish the US gov would have learned the lesson. Sadly, I don't believe they have learned anything.

  • air ma pas cher||

    thank you


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