One strong current of thought since the Republicans’ impressive showing in the recent House elections has been to privatize Fannie Mae and Freddie Mac. It would certainly fit in to a “less government” ethos and it’s an easy enough concept to think of. The problem is, the mortgage market has been subsidized by the federal government for nearly a century, since the addition of the mortgage interest tax deduction, and it is not going to be an easy job to pry Uncle Sam’s fingers away.
We will be the first to agree that there must be a better way to run the secondary market than the current model, which has cost taxpayers $150 billion and counting. But, how to do it? Treasury secretary Tim Geithner, who has a mandate to report to Congress with a solution early in January, emerged from his last huddle on the topic and said there is no consensus on what to do.
The federal footprint is all over the mortgage market. As just noted, there is the mortgage interest deduction. There’s the Federal Housing Administration, which insures hundreds of billions of dollars in mortgages a year. There’s the Government National Mortgage Association, which packages FHA loans into securities. There’s the “implied guarantee” of federal backstopping of Fannie and Freddie, which came true when the government nationalized the GSEs. There’s federal deposit insurance, which supports depositories that are mortgage lenders. There’s the Federal Reserve, which buttressed the mortgage market by buying hundreds of billions of dollars worth of mortgage-backed securities. Unwinding this much involvement cannot be done overnight.
Which private entities can step up to the plate and replace Fannie and Freddie? A few years ago, there were mini-GSEs of a sort that bought subprime mortgages and packaged them into asset-backed securities. These private conduits tended to vaporize during the mortgage meltdown they contributed so mightily to. Who else is there? Can megalenders like Bank of America or Wells Fargo step in? Do we want them to?
The process of privatizing the GSEs would appear to be a slow one, rather than a quick one. It will be interesting to see what the administration’s answer will be a month from now. The bleeding from the GSEs must be stopped, one way or another. It is interesting to remember what an official of FHA pointed out at a recent mortgage banking meeting—FHA has never lost a dollar. And Ginnie Mae actually makes money for the government.
