Immortal Fannie, Immortal Freddie
The next bubble is built into our assumptions about housing ‘investments.’


Kevin D. Williamson

Are Fannie and Freddie ever going away?

Almost certainly not.

Why not? For one thing, the law already requires that the government-sponsored enterprises be taken out of conservatorship and put into receivership, as Mark Calabria points out, because they have reached the point of negative equity. If the government is willing to ignore its own laws on the GSEs right now, what reason is there to believe it will take painful steps tomorrow? The issue of conservatorship vs. receivership is sort of like hospital vs. hospice: Enterprises in conservatorship are thought to have a possibility of surviving, whereas those in receivership are generally in the process of being dismantled and laid to rest. Which is precisely where Fannie and Freddie belong.

The Obama administration simply is not serious about winding down the GSEs any time soon. President Obama’s new budget assumes that the government will be collecting billions of dollars in payments from Fannie and Freddie a decade hence, suggesting that whatever purported plans there are to wind down the GSEs are scheduled to take place at some distant remove in the misty future. As Mr. Calabria puts it: “For Fannie Mae and Freddie Mac to be paying dividends in 2021 requires that they still be around.” To paraphrase the great Burkean philosopher Bluto: Fannie and Freddie have a long tradition of existence, and it is unlikely to be disrupted.

That is bad news — and for more reasons than might immediately be obvious. The unique awfulness of Fannie and Freddie, which together formed a fraud-abetting payola apparatus for well-connected politicians and acted as a prime inflator of the housing bubble, is well documented. But as long as the federal government continues to intervene in the housing markets — as long as the federal government plans to conduct any sort of robust housing policy — it is going to need something like Fannie and Freddie to do its dirty work. Maybe that will be the GSEs themselves, living on in administrative immortality. Maybe it will be the Federal Housing Finance Agency, which currently acts as the GSEs’ conservator. Maybe it will be private banks commandeered through regulation, as they were commandeered for political purposes under the Community Reinvestment Act and similar pieces of legislation. It matters less what the instrument of policy is than what the policy itself is. (For a longer discussion of this brand of socialism via regulatory proxy, read the book.)

Our federal housing policy is doomed to repeat the mistakes of the past because there is a deep contradiction at the center of it. The irreconcilable difference is that the government wants housing to be: A. affordable, and B. an investment that provides real returns. You cannot have both.

If housing is to be an investment that provides real returns, then the price of housing must, in aggregate, rise more quickly than the rate of inflation. If housing prices rise only at the rate of inflation or less, then there are no returns to owning housing; you’d be better off putting your savings in CDs or a simple savings account. That’s because, for a lot of people, a house is not a very good investment. Yes, you avoid paying rent if you own, but you also acquire permanent tax, insurance, and upkeep obligations, along with value risk, etc. You also forgo the returns you’d get from investing the money; in many cases, this will represent a net loss, even accounting for saved rent.