CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press WaPo Can't Find Anyone Who Wasn't Surprised by Housing Collapse As a Source on Privatizing Fannie and Freddie

WaPo Can't Find Anyone Who Wasn't Surprised by Housing Collapse As a Source on Privatizing Fannie and Freddie

Print
Wednesday, 12 March 2014 06:57

A Washington Post article on plans to privatize Fannie Mae and Freddie Mac likely misled many readers about their role in the housing bubble and the nature of the new system of housing finance being pushed in Congress. The piece told readers;

"The companies [Fannie and Freddie], which were seized by the federal government in 2008, were widely blamed with exacerbating the financial crisis by buying millions of risky loans and passing on the risk to consumers."

While Fannie and Freddie did help to inflate the bubble and got stuck ensuring many bad loans, the worst mortgages were securitized by private investment banks like Goldman Sachs and Citigroup. This point is important not only as a matter of historical accuracy, but it also is central to the problem with the new system being proposed.

In effect the new system would allow Goldman and Citi to issue subprime mortgage backed securities (MBS) with a government guarantee. They obviously had no problem selling MBS composed of junk mortgages with no guarantee. Under the new system they would be able to tell investors that in a worse case scenario they would lose no more than 10 percent of their investment.

This creates a moral hazard problem that virtually guarantees future problems. As happened in the bubble years, the issuers can make large profits by securitizing garbage and then leaving the government with the overwhelming majority of the risk.

At one point the piece quotes Senator Tim Johnson, the chair of the banking committee:

"There is near unanimous agreement that our current housing finance system is not sustainable in the long term and reform is necessary."

It would have been worth pointing out that such an agreement reflects the politics on the issue, not the economics. The United States saw a boom in homeownership over the three decades from when Fannie Mae was created in 1938 to when it was privatized in 1968. There is no economic reason that Fannie and Freddie could not be run as public companies indefinitely. However the financial industry sees securitizing mortgages as a huge source of potential profits. The fact that the financial industry is a powerful political force and a large contributor to political campaigns is the basis for the near unanimous agreement on privatizing Fannie and Freddie, it has little to do with the merits of the new system. 

Comments (9)Add Comment
Worst possible arrangement
written by Dave, March 12, 2014 7:45
This privatization proposal is absolutely outrageous. It is the worst possible form for Fannie and Freddie. Any remnants of these companies should be 100% public owned. I'm in favor of eliminating all government guarantees as a first step. These criminals want to suck profits from a system worse than what caused the collapse!

Obama should throw cold water on this now! He should say he'll veto it so they can so they can stop wasting time!
Fannie and Freddie are now profitable
written by Robert Salzberg, March 12, 2014 7:46
Fannie and Freddie returned to making money a few years back and have paid back the money loaned to them with interest as of this year. Not only is the current formation of Fannie and Freddie sustainable, but it also is scheduled to refund billions back to taxpayers for the foreseeable future.

Refunding taxpayers for the implicit backing of mortgages seems like a fair deal for taxpayers. It's very sad that there is almost no one is Congress that puts people before corporate profits on this issue.
Good News: Senate Proposal is DOA
written by Paul Mathis, March 12, 2014 8:22
Sen. Johnson is retiring and Crapo has no power at all, so this latest stupid idea will soon be forgotten.

Fannie and Freddie were doing fine for decades until a bunch of crooks took over the leadership and cooked the books to get huge bonuses for themselves. Independent auditors and Congressional oversight of the operations would have stopped the fraud, but nobody in Congress is interested in doing their jobs.
...........
written by DJB, March 12, 2014 8:26
the part about fannie and freddie being completely government programs from for 30 years from 1938 to 1968

and thriving when it was

..............

thats the first i have heard of this

..............

thats an important fact left out of the public forum

don't you think??
..., Low-rated comment [Show]
they are simply archane...
written by pete, March 12, 2014 9:35
Rent seeking pervades all government. Look at how Frankendodd has guaranteed monopolization of banking. The real horror of the F&F disaster was the conning of the congresspeople from the inner cities. These folks were duped into supporting lax controls on F&F, dispite folks like Ralph Nader and the WSJ arguing for more oversight in the early 90s.
...
written by Last Mover, March 12, 2014 12:09

Wow, what a chance for Obama to step forward and lead, beating the Repubs on their own turf at stopping big government and moral hazard handouts. And it won't even look like another feeble concessionary cave-in move before the fact, instead a big win hands down for Obama.

That's why he won't do it.
Not only have Fannie&Freddie ...
written by John Puma, March 13, 2014 7:15
"returned to making money" ... "paid back the money loaned to them with interest" ... and "is scheduled to refund billions back to taxpayers for the foreseeable future" (as per R Salzberg, above) But they also have begun winning cases against the fraudulent banks who sold them bundles of junk mortgages.

The two links above describe $4.6 billion recovered as levied fines.

I rather doubt these are the only settlements that have been made or will be made

1) http://tinyurl.com/n4klj6v
2) http://tinyurl.com/kx6j663
Fannie and Freddie shouldn't make much money
written by Dave, March 13, 2014 8:30
Let's stop using private market metrics to judge government entities, please. Financial companies with a privileged role granted by government cannot be judged by how much money they make. Often these arguments are used to justify the fed actions, but the main reason for doing so is that the people asking about profits and losses are ignorant, so speaking their language, while deflecting criticism, doesn't address what citizens should be concerned with.

Let's not train citizens that the government exists to make a profit, please.

Write comment

(Only one link allowed per comment)

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

busy
 

CEPR.net
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.

Archives