The Corner

Net Losers

John Carney argues that Fannie and Freddie’s mounting losses will eventually outweigh any benefits they provided in terms of lower mortgage-interest rates:

This may surprise many people. After all, how could it be that Fannie and Freddie completely failed in their mission to provide affordable housing to Americans? Weren’t there benefits in terms of lower mortgage rates that should balance out the bailout costs? Well, as it turns out, those benefits may have already been dwarfed by the amount of taxpayer money that has been used to rescue the companies. Even judging by the most optimistic estimates of the benefits from Fannie and Freddie, the companies will likely be net losers for the U.S. by year’s end.

The key to understanding this is to look at how much in total Fannie and Freddie may have saved homeowners in mortgage payments. The advantage of having Fannie and Freddie operate as government sponsored entities was that they could borrow at lower rates than purely private companies. Under the so-called “implied guarantee” lenders assumed the government would back up Fannie and Freddie, so they were willing to lend to the companies at lower rates. This, in turn, enabled them to make mortgage loans at lower rates.

Carney quotes a professor who puts borrowers’ savings at $100 billion over the lives of the companies:

Comparing that $100 billion savings against the government’s pledge of $400 billion in financial support for Fannie and Freddie raises the question of what good these companies ever did. The drawings on that pledge are still less than $60 billion–around $45 billion for Freddie and $15 billion for Fannie–but are expected to exceed $100 billion by the end of 2009.  If further drawings come to pass it will mean that even using the most optimistic estimates for the interest rate savings provided by Fannie and Freddie, the companies have been huge costs for taxpayers with no net tangible benefits.

John is right, but he has neglected an important aspect of Fannie and Freddie’s political economy. When taxpayers bail out Fannie and Freddie, who pays the bulk of the taxes? The wealthiest 2 percent account for something like 60 percent of all federal income-tax receipts, and Obama wants that number to go up. I think it’s safe to say that most of these taxpayers have nonconforming home loans and probably didn’t benefit at all from their implicit guarantee of Fannie and Freddie’s debt. So yes, Fannie and Freddie are net losers, but so are most income transfers.

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