Why am I not entirely confident that having five little Fannies and Freddies will be better than having two of them?
The U.S. government is not very good at being in the mortgage business. The GSEs have been sties of corruption and fraud, staffed by the worst sort of bottom-feeding political careerists this country is capable of producing. The distortions that government policy introduced in the housing and mortgage markets were a key factor (though not the only factor) in the housing bubble and the financial crisis of 2008.
Rather than liquidate the portfolios of Fannie Mae and Freddie Mac as a prelude to shutting down these government-backed financial malefactors and allowing the market to price mortgages (and houses) as it will, a bill unveiled today would replace the two GREs with five GREs, the securities of which would be explicitly guaranteed by the federal government. This is a “bipartisan compromise,” meaning that it is the product of roughly equal inputs from the Stupid Party and the Evil Party.
In the end, replacing Fannie and Freddie with Onesy, Twosy, Threesy, Foursy, and Fivesy would still leave taxpayers on the hook for bad mortgage-backed securities, meaning that securitizers, mortgage lenders, bankers, and everybody else on down the real-estate food chain would continue to have mortgage risk subsidized by the U.S. government, with all the problems that attend that situation.
Yes, there are some good things in the bill: The new entities would have significantly higher capital requirements, and their securities would be insured by an FDIC-style fund charging a premium for its services. All to the good — but that still leaves the fundamental problem of political manipulation of the mortgage market unaddressed.
The basic problem is this: Mortgages are long-term investments that a lot of lenders do not want to keep on their balance sheets — at least at current mortgage-interest rates. Socializing mortgage risk means that mortgage lenders are willing to write loans at lower rates, meaning that buyers can take on larger loans at lower payments — and everybody in the market is thereby encouraged to take on excessive debt and risk, bidding housing prices up. If the government ceases to socialize mortgage risk, then interest rates on mortgages probably will go up, borrowers will take on smaller loans, and there will be downward pressure on the price of houses, a bad thing if you’re a seller and an excellent thing if you’re a buyer. Mankind has been buying and selling real-estate for a few thousand years or so, and, for most of that time, central-government intervention was not thought to be necessary. This is a case in which we can predict with some confidence that markets will work.
We tend to think of home equity as being a general social good: Homeowners are thought to be, in effect, better citizens than renters. But as Reihan Salam has documented, it matters what kind of homeownership you’re talking about. Low-equity and negative-equity homeownership is probably a net loss, socially speaking, bringing none of the benefits of high-equity homeownership and imposes real economic costs — for instance, by trapping unemployed people in jobless areas.
The GRE compromise is the wrong kind of compromise. The real solution is to establish a reasonable timeline for selling off the GRE portfolios — ten years, twenty years, whatever — and allowing markets to price mortgages as they will, with the government explicitly disavowing any future guarantee of any privately issued security or private financial institution. Given that we have a shiny new “resolution authority” under the Dodd-Frank financial-reform bill, disavowing future bailouts should be no problem, right? Right?
— Kevin D. Williamson is a deputy managing editor of NATIONAL REVIEW and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through NATIONAL REVIEW ONLINE here.