CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press If Fannie Mae Goes Out of Business, How Will It Enforce Sanctions Against Strategic Defaulters?

If Fannie Mae Goes Out of Business, How Will It Enforce Sanctions Against Strategic Defaulters?

Friday, 25 June 2010 05:09

That is a question that the NYT should have asked in an article reporting on Fannie Mae's new plans to punish people who walk away from a mortgage that they could still pay. The article notes several problems that Fannie Mae will encounter in trying to impose its announced penalties on strategic defaulters, but only mentions in passing that the company many not even be in business for 7 years.

This matters in the current context, since one of the sanctions is that Fannie Mae will refuse to buy a mortgage by anyone who had strategically defaulted for 7 years. This could have a big impact on a person's ability to get a loan if Freddie Mac adopts the same policy and the two companies still dominate the secondary market 7 years from now. However, if the companies are shut down, as many people advocate (perhaps more will now), then this sanction will be meaningless.

In this context it probably is also worth noting that the top executives of both Fannie Mae and Freddie Mac earn $6 million a year (more than 30 times the pay of the Treasury Secretary). These publicly owned companies have repeatedly upped their estimates of losses from the collapse of the housing bubble.

The article is also far too generous in its explanation of Fannie Mae's collapse, telling readers: "during the housing boom Fannie overreached and bought many loans of buyers who were ill-equipped to pay them." Actually, Fannie Mae and Freddie Mac, both completely missed the housing bubble. Even though housing is all these companies do, they could not see the $8 trillion bubble in the market. They did not alter their loan buying behavior at all (actually they became less cautious) as house prices grew ever more out of line with fundamentals. It was easy for anyone, other than the highly paid executives who ran the companies, to see that they would face serious problems when the bubble burst.

Comments (3)Add Comment
Krugman consistency?
written by AndrewDover, June 25, 2010 8:03

Mr Krugman says:
"During those same years (Mid 00s), Fannie and Freddie were sidelined by Congressional pressure, and saw a sharp drop in their share of securitization"


Mr Baker says:
"They did not alter their loan buying behavior at all (actually they became less cautious) as house prices grew ever more out of line with fundamentals."

And the answer to your question is plainly in the article. FHA and whatever new government entity that follows Fannie/Freddie can deny mortgages to defaulters by choice.

Of course "Mortgage Bankers" would like their old deadbeat customers to try it all over again in a few years. That is how Mortgage bankers get comissions; they fob the risk onto someone else, and in extreme cases, conspire with borrowers to comit fraud in the loan applications.

And yes, Fannie/Freddie executives should be on the GSA pay schedule by now.
written by skeptonomist, June 26, 2010 9:01
It is unlikely that Fannie and Freddie would vanish entirely, but possible that they would go back to being government-run as Fannie was originally. Government bureaucrats might not be able to spot real-estate bubbles and see their downsides any better than executives in the private sector, but they certainly would not see the short-term upsides of inflating a bubble with crazy lending policies (unless they have the responsibility, like the Fed, of boosting the economy out of recessions). Even Alan Greenspan at least claimed to finally see the limitations of pure self-interest on the part of executives.
written by skeptonomist, June 26, 2010 9:07
By the way, bankers, Fed chairmen and Fannie/Freddie executives are not the only ones who don't see the dangers of real-estate bubbles. Congress did everything it could to reinflate the bubble and if they had their way we would be back in 2007.

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.


Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.