Another Look At Fannie and Freddie

For what it is worth, I am the proud owner of a “Fannie Fraud Patrol” T-shirt.  The fraud patrol was a loose mix of investors who felt that Fannie Mae’s finances were misstated back in 2003.  My small contribution to the effort was showing that the fair value balance sheet was not compatible with the standard balance sheet.  That was a pretty basic finding for an actuary used to doing cash flow testing.

I did not post much on Fannie and Freddie after the partial takeover by the US Government, because there wasn’t all that much that I could add.  I had gotten my calls right, most notably:

If you followed those calls, you made good money, particularly the first one.

But with all of the fuss over the actions of the Treasury, I must note several items:

  • Congress has the power to reverse or modify what the Treasury has done.  (Not that I ever expect much out of Congress…)
  • Even if the Treasury succeeds in lowering mortgage rates, that does not mean much when borrowers aren’t capable of scraping together the proper downpayment.    Lower interest rates do not stimulate economic sectors under stress, but do stimulate healthy sectors, as housing did in 2001-3, while industry suffered.
  • I don’t like being a wet blanket, but aside from preventing systemic risk from letting senior debt and agency MBS suffer credit risk (these are big things), there isn’t a lot to boast about in the takeover.  At best, this leads to the wind-off of two entities that never should have been created.  Housing should not be subsidized by US taxpayers.

To the free market purists, who I sympathize with, I say let the hybrids die.  Our government has meddled too much in lending markets, but it is egregious when they do so where there is a private profit motive.  This bailout delivered real pain to those that were equity holders, while protecting against systemic risk.  The moral hazard issue to equity and preferred holders is dead.  They can lose it all, or close to it.  This is real improvement.

To liberals I say the public interest has been protected.  Systemic risk is avoided.  It is better that those without the wherewithal to own homes rent, than that they strain to own.

To all of Congress I say, if the Administration comes to you asking for a rise in the debt ceiling, ask them to sell their mortgage-backed securities first.  Why should those with mortgages be favored over renters and freeholders?