In the lead-up to tomorrow's Government-Sponsored Enterprise (GSE) reform conference, I'm not sure I've been clear on why these agencies are so crucial to our economy and, correspondingly, why changing their structure, role, and even fundamental existence is going to be a tricky push for policy-makers. Hopefully the above chart will help explain that. It shows the percentage of mortgage-backed securities issued by Fannie Mae and Freddie Mac, in relation to the total market of mortgage securities -- basically, the percentage of new securities backed by the government as opposed to privately issued. (The data comes from SIFMA, a trade association of securities dealers.)
You can see that since 1996, the government has been (implicitly, until 2008) supporting the housing markets by buying packages of mortgages and issuing mortgage-backed securities of those and its own home loans to the secondary market, providing liquidity (the promise that MBS can be bought and sold pretty much at will) to lower mortgage interest rates -- otherwise, lenders would need to sit on 30-year mortgage loans for, well, 30 years, making them a more costly proposition.
You should also see a dip starting in 2004: That's when private mortgage lenders crowded out, if you will, the government, by issuing so many subprime MBS. (Subprime was defined, roughly, as "a loan that is too crappy for Fannie and Freddie.") You can also see in 2008, as the bubble popped, the agencies took the lead again as Congress used them to backstop the housing market by purchasing more securities.
Now nationalized, the agencies are currently backing 99 percent of MBS issued this year; last year was just a tick lower at 98 percent. That in turn means that the two GSEs are backing nearly every home loan issued in the last three years, not to mention those on their books prior to the crisis. Reforming Fannie and Freddie involves reforming an institution that stands behind not just the housing market but Americans' homes, a very dicey proposition indeed, which is why politicians shied away from the issue while crafting the financial-reform bill.
This data also points to the problems in an op-ed on this topic by financial journalist John Carney. Carney argues that the GSEs aren't supporting the mortgage industry but instead holding it back. In the very narrow sense of failing to support alternate home loans like shared-equity mortgages, he's right. But in the broader sense that the GSEs will crowd out the private lending market thanks to the Dodd-Frank financial-reform bill, it's clear that's not reflected in reality -- they were already crowded out, as the anonymous lawyer behind Economics of Contempt noted last week.
The real issue seems to be that private investors aren't interested in mortgage securities right now, and likely for good reason. The problem of GSE reform is figuring out how much the government ought to be involved in the mortgage market backing affordable homeownership, and the correct mechanism to achieve that, without upsetting the apple cart. But Carney and other critics of the GSEs are right in at least this much: Having the government on the line for so many home loans isn't a great idea, but right now it's all we've got.
-- Tim Fernholz
