Pink slips for Fannie and Freddie
Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.
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: