I have to stop reading the financial newspapers while having my breakfast because it is bad for my digestive system. The other day, I nearly gagged on a spoonful of Fruity Pebbles when reading a New York Times article that claimed Washington insiders have declared that Fannie Mae and Freddie Mac will ‘never fully return to private hands.’ Â
Okay, I am kidding – I don't really eat Fruity Pebbles for breakfast (apologies to Fred and Barney). However, the Times doesn't appear to be kidding when it claims that ‘lawmakers and company executives are beginning to quietly acknowledge’ that the government-sponsored enterprises (GSEs) will move into the future as federal agencies. I really wish they were kidding, because a future of Fannie and Freddie as permanent fixtures of the federal government will be a disaster.
For starters, the government cannot afford to be a parent to money-bleeding entities – Fannie Mae lost $58.7 billion in 2008, which is greater than all of its net profits in the past 17 years combined. At a time when the federal deficit is out of control, the last thing Washington needs is more red ink. There is also the question of whether government domination of the secondary market will ultimately distort how the mortgage banking industry operates. Absent of a private-label sector, the government pretty much has a monopoly on secondary market.
The good news is that secondary marketing is continuing. The bad news is that the federal government is literally the only game in town – and that's especially disastrous news to the jumbo market, which has been excluded from the administration's efforts to assist homeowners.
So what is going to happen to Fannie and Freddie? I would like to think the Times is blowing smoke rather than serving facts. For starters, its article did not quote anyone in the Fannie or Freddie upper echelons – let alone the Federal Housing Finance Agency or the Obama administration – to confirm this. Thomas A. Lawler, a Fannie Mae economist who left the GSE in 2006, was cited, but that shouldn't count.
As for lawmakers, the Times did bring in a comment from Rep. Barney Frank, D-Mass., who stated, ‘Some of what these companies did will be returned to the private sector, and some of it is going to remain with a public entity.’
Of course, Frank's comment contradicts the notion of a permanent federal ownership of Fannie and Freddie. But at this stage, Frank is clearly not calling the shots – the Obama White House is picking up from the Bush White House as being the game master here, with Congress looking on as a distinctively unequal partner.
Another Congressman, Rep. Scott Garrett, R-N.J., was also quoted by the Times. ‘Once government gets a new tool, it's virtually impossible to take it away,’ he said. ‘And Fannie and Freddie are now tools of the government.’
Garnett added that he feels the GSEs will be used for ‘political purposes, such as helping low-income borrowers or expanding homeownership.’
If Fannie and Freddie are retooled in the manner that Garrett envisions, then we'll be reliving the George Santayana aphorism of what happens to people who forget history. A stable housing market is determined by the quality of loans issued, not the quantity of loans. In any event, there is no shortage of federal programs available to encourage activities in the troubled patches across the urban and rural markets and tribal lands. Fannie and Freddie were not meant to exclusively maintain that mission, nor should they be realigned for such purposes.
We have yet to hear from President Obama, Treasury Secretary Timothy Geithner or Fed Chairman Ben Bernanke on where Fannie and Freddie will specifically fit into the future of the economy. Until such time, I am hoping that speculative news articles on the GSEs' fate remains little more than speculative.
And for my own sake, I'll refrain from reading financial news articles while having breakfast – I don't want to start the morning with heaping spoonfuls of upsetting news.
– Phil Hall, editor, Secondary Marketing Executive.
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