Pink slips for Fannie and Freddie

August 7, 2013

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President Obama wants to eliminate a government-owned company that just made a $5 billion profit. More specifically, he wants to eliminate both Freddie Mac and its sister Fannie Mae by 2018, and replace them with a new “common securitization platform” for mortgage securities where private investors bear mortgage risk, not the government: “For too long, these companies were allowed to make big profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag… It was ‘heads we win, tails you lose.’”

Sober Look thinks that Obama’s plan is a “hell of an undertaking”: 84% of the mortgage-backed securities issued so far in 2013 have been government backed. And, Sober Look says,  there’s no surefire plan to transfer that risk to private investors. House Republicans have proposed eliminating not just Fannie and Freddie, but also pretty much every form of government support for the housing market. There’s also bipartisan Senate bill that broadly mirrors the President’s preferences.

Megan McArdle notes that while the president says private investors should bear mortgage risk, he paradoxically wants to keep the 30-year mortgage alive and well. The 30-year mortgage is, Felix pointed out, a financial product that, without massive government support, would “never normally exist in the wild”, and which McArdle notes doesn’t really exist in other countries. In Canada, for example, people seem to get by just fine without them.

Abolishing the 30-year mortgage is an idea that’s been floating around the policy wilderness for years. And the mortgage interest tax deduction, a sacred cow of US domestic policy, continues to push Americans toward buying houses, and relatively well-off ones at that: half of federal housing assistance goes to families earning more than $100,000.

Josh Barro thinks this misses a simple, elegant solution to the government’s deep involvement in the housing market: fewer people buying homes. Renting should be promoted, he writes, not as the “result from a temporary incapacity that you will eventually overcome”, but as an aspirational middle-class value.  Pat Garofalo concludes that “the real problems lie in what everyone takes for granted about how the US housing market operates. A much more significant re-think is necessary to avoid the mess that built the housing bubble”. — Ben Walsh

On to today’s links:

Crime And/Or Punishment
Meet BOAMS 2008-A: the latest MBS issuance to run into legal problems – Reuters

25% of Groupon’s revenues now come from selling low-margin, discounted junk – Jason Del Rey

Billionaire Whimsy
“Bezos paid a friendship premium of $200 million” – Bloomberg

The Fed
Why the Fed is still likely to taper in September – Tim Duy
The Bank of England ties interest rates to unemployment – Reuters

Increasingly unemployed and not in school: the state of America’s 16-24-year olds – Fortune
Being unemployed for more than 9 months is like losing 4 years of work experience – WSJ

They’re Just Like Us
The Al Qaeda conference call that closed embassies in 22 countries – Daily Beast
Previously: Al Qaeda terrorist reprimanded for failing to turn in expense reports – AP

What’s killing the Maine lobster industry? Climate change and Canada – Quartz
Why you can never buy concert tickets online – New Statesman

The amazingly efficient, vacation-saving Hudson Street passport office – Slate

There is a Nashville ETF for some reason – Reuters

Data Points
It costs $226,378 to make Goldman Sachs temporarily slightly uncomfortable – FT Alphaville

Lean In, Out, or Sideways
The women featured in a 2003 NYT piece about opting out of the workforce are looking for ways back in – NYT

Reasons to Floss
Gingivitis is associated with greater risk of heart disease, diabetes, and Alzheimer’s – Bloomberg

“Very many of the most successful entrepreneurs came from pretty wealthy families” – Chris Dillow

Bad news for Bitcoin: a judge has ruled that it is ‘a currency or form of money’ – Coin Desk

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