Are Fannie and Freddie really worth it?

August 18, 2010

CNBC’s John Carney nails it right on the head:

Defenders of Fannie and Freddie insist that their role in making mortgages cheaper is vital to the market and expanding home-ownership.

But this is nonsense. Fannie and Freddie never made mortgages cheaper — they merely hid the costs. The subsidy was illusory.

Economists estimate that over the course of their lifetimes, Fannie and Freddie probably saved homebuyers $100 billion in mortgage payments. That compares very badly to the $145 billion in bailout funds they’ve already received — and horribly with the $386 billion the Congressional Budget Office says the companies will cost taxpayers over the next decade. Homebuyers got cheaper mortgages but at a very stiff price for taxpayers.

Any sensible person can see that this is a bad deal.

If we really want to make home-mortgages cheaper, we would do far better admitting that we cannot do this for free. The money saved on the mortgage will end up on the tax bill.

Several studies show that the benefit to mortgage rates is quite slight, perhaps as little as 20 basis points.

3 comments

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If the FED didn’t buy $1.25T in MBS from the private banks (Citi, JPM, BofA etc) then we wouldn’t talking about Frannie, b/c Frannie’s losses would pale in comparison. It sucks that taxpayers are on the hook for Frannie losses – it sucks bigtime! – but the FED could’ve bought a big chunk of Frannie’s worst assets and hid it on their balance sheet too and we wouldn’t be hearing all these cries of woe about Frannie.

Just my opinion… and an opinion that counters CNBC logic is usually a lot closer to the reality of things (see shorting Cramer’s picks etc)

Posted by CDN_finance | Report as abusive

Were they exempt from paying corporate income taxes? If they did not pay income taxes the cost is even higher.

Posted by wfl | Report as abusive

Carney forgets one important point in his equation – home prices! The private market screwed up the housing market with their greed and dispassionate arrogance and we, the taxpayers have had to make up for their avarice.

Without Freddie and Fannie, though they are going to cost us a tremendous amount of money, home values across this country would probably decline by $2 trillion at the least.

So, Jimmy P, your insistence to quote Carney is a huge and disingenuous mistake that points directly back to the excess of free-market capitalism.

Posted by jim_worth | Report as abusive