A Rare Point of Agreement

Margaret Chadbourn of Reuters recently reported {April 23} that both Republicans and Democrats have “found a rare point of agreement.” They want to phase out or at least substantially reduce the role of the Federal National Mortgage Association (Fannie Mae ) and the Federal Home Loan Mortgage Corporation (Freddie Mac ) in the residential mortgage financing industry. Currently, Fannie and Freddie now support 60% of all new U.S. home loans.

Lawrence Yun, chief economist for the National Association of Realtors disagrees.  In his April 23rd blog post, “Economist Commentaries,” Yun argued that Fannie and Freddie are the perfect entities to be run and maintained by the government because of the inherent bureaucracy in government.

It is this tangled web of what is essentially inefficiency, Yun argues, that make Fannie and Freddie the perfect entities to provide traditional, unimaginative, simple mortgage loans, such as 30 year fixed loans.  As Mr. Yun said, “The Apple iPhone, for example, simply could not be produced out of Washington. However, there is something that government may be good at and that is producing a boring product.  There is next to nothing as boring as a 30-year fixed rate mortgage.”

An Urgent Need for Stability

As we posted, FinCen reported on April 23rd, that SARs have significantly decreased, indicating improvement in mortgage lending due diligence.  Can we not expect the same improvement from our government sponsored entities of Fannie and Freddie?

Admittedly, other massive government-run programs such as Medicare, which is riddled with fraudulent payouts and inept governance, do not offer much comfort. But if Freddie and Fannie stick to actually underwriting the loans they purchase rather than, as they both frequently did during the housing boom, approving loans based on misplaced reliance on the “underwriting” performed by Wall Street and the big aggregators, perhaps they can be salvaged.

Despite agreement by the politicians as to eliminating or at least reducing future involvement of the GSEs in the mortgage markets, this is an election year and no one sees Fannie’s and Freddie’s roles being radically changed any time soon.  At the same time, there is an urgent need and hope for stability in the real estate market that many believe is not likely to occur without the continued involvement of the GSEs.

Since the mortgage bust in 2008, we have also witnessed the actions of Wall Street and the big bank aggregators in accepting public bailouts, continuing to expand their TBTF sizes, privatizing profits, and engaging in questionable servicing practices and other misdeeds, all without helping to create any real liquidity or stability in the mortgage markets.

Having seen the private sector’s failings both before and during the mortgage loan crisis, perhaps boring is best-we could at least distance ourselves from ever again having to bail out ungrateful, self serving “too big to fail” private entities — no matter how “exciting” that may be.