Apparently, Fannie Mae and Freddie Mac aren't going to be privatized anytime soon, if at all. That's not really big news, though, since even before the government took them over last summer, they were operating under an implicit guarantee that the United States would protect them from financial danger. And look at that, it worked. Fannie Mae's history, beginning as the New Deal-era Federal National Mortgage Administration (FNMA, get it?) and eventually being privatized in the sixties to help pay for the Vietnam War by getting its loans off government books, has always been tied up in the government. The question is how responsibly and how explicitly. When it was part of the government, its loans were on the books and it acted responsibly, fueling the post-World War II homeownership expansion. Privatized, Fannie Mae's managment acted irresponsibly while loans were off the government's books -- but the government was still there to pay the bills when they came due.
The article paints as nefarious the idea that government might be involved in the housing market, but government policy has always been involved in the housing market, if never so directly, and generally has been aimed at building up the housing bubble. (Though contra conservative spin, Fannie and Freddie did not cause the mortgage crisis, they were victims of it -- they mainly stayed out of irresponsible loan markets until 2007, when it was thought that they could prevent the crisis by purchasing lots of sub-prime loans.) So while keeping Fannie and Freddie in their currently quasi government status -- nationalized in all but name -- has been tough on management at the two organizations, it may be the wisest plan to complete the job and enter full nationalization, since the two entities won't pay off their huge government loans for perhaps one hundred years. Arguments against the idea will probably sound as ridiculous as this:
“The theory was that if Fannie and Freddie were private, they would only be interested in profits, and so they wouldn't take too many risks,” said Thomas A. Lawler, an economist who worked at Fannie Mae for more than two decades before leaving in 2006 to become a consultant. “If the government owns Fannie and Freddie, politicians will make choices that make voters happy, but may not be wise from an economic standpoint.
Ha, people interested in profits don't take risks! You're killing me! Tell me the one about how voters aren't happy when the economy is doing well!
Ahem. Obviously you don't want an overpoliticized mortgage process. But the problem with the mortgage market in the last two decades has been not enough government oversight, not because of too much politics corrupting the system -- that is a myth that doesn't stand up when you look at the facts, like the idea that low-income minorities caused the housing crisis. In any case, HUD Secretary Shaun Donovan is going to take the lead in the administration on righting the mortgage system, public and private, so that it can operate effectively to provide responsible home loans. It's unclear yet how Donovan and Congress will address the issues of Fannie Mae and Freddie Mac, but the most important step is clarity: no more entities with implicit government guarantees that create incentives for lemon socialism -- privatize the rewards, nationalize the risk. Either nationalize the two agencies (which may be inevitable) or break them up into smaller, heavily regulated concerns.
-- Tim Fernholz
