A Fannie/Freddie By Any Other Name

Politicians are now paying lip service to reforming Fannie/Freddie. I wouldn't expect anything to actually get done but be prepared for all sorts of hair brained ideas. The first is by Congressman Barney Frank.

The more things change, the more they stay the same. Take the case of Barney Frank, Chairman of House Financial Services Committee. In an interview with FOX Business’ Neil Cavuto, he called for Fannie Mae and Freddie Mac to be abolished. “The only question is what do you put in their place,” he said.

...

What would he propose? He said, “I’ve worked closely with the Financial Services Roundtable… They are talking about the following: first of all, you separate it out, so there’s no more hybrid public-private. So, Fannie and Freddie and anything like them go out. You have a purely public FHA [Federal Housing Administration]… [that is] fully self-financing.”

Frank added, “If we want to subsidize housing then we could do it upfront and let the budget be clear about that.”

Clearly, Barney Frank hasn't been paying attention to me. Beyond that, Frank clearly doesn't understand why Fannie/Freddie are such a problem. It's as though the problem is the names. They've become too toxic and so if we change them and have another mechanism that does the exact same thing everything will be fine.

Let's start at the beginning. Mortgage securitization is a very complicated process but, in my opinion, it's a necessary one. It provides liquidity in the market and it transfers risk from banks to speculators. All of that is good. That means more people get loans and rates will be lower.

The problem is that in loan securitization there's only two games in town, Fannie Mae and Freddie Mac. That's duopoly and those never work. The second problem is that both are extensions of the government. So, what we had was a government run monopoly on securitization. Fix both problems and you fix Fannie/Freddie.

Instead, Barney Frank wants to go the other way. He wants to stop simply having an implicit government guarantee and just have an explicit government guarantee. Of course, that perpetuates the problem.