The Treasury says it will put out proposals on the future of Fannie and Freddie early next year but there are few signs that politicians are prepared to get rid of them altogether.They should. The GSEs' mission is to provide “liquidity, stability and affordability” to America's mortgage market. Set aside the fact that these aims tend to conflict: cheerleading for cheap mortgages is likely to produce instability, for example. The bigger question is why Fannie and Freddie are needed to achieve them. America's obsession with home ownership is itself questionable, especially now that the trap of negative equity has hampered workers' ability to move in search of jobs. Even if it were a valid goal, there are plenty of countries (Australia, Britain and Canada among them) that have similar or higher levels of home ownership with far less, and in some cases no, systemic government support (see article).
As for liquidity, the argument that America needs Fannie and Freddie because private securitisation markets do not exist to take their place is circular. The GSEs have guidelines for the types of home loans they can guarantee: these let Fannie and Freddie colonise the safest, “conforming” bits of the mortgage market (before expanding into dodgier bits), leaving private lenders to swerve around them into ever-riskier areas. If the GSEs were not there to securitise and guarantee prime American mortgages, private firms would take their place.
A gradual withdrawal is needed. The first step is to run off or sell their retained portfolios of mortgages. A second would be to squeeze the definitions of conforming mortgages over time, so that bit by bit Fannie and Freddie lose control of chunks of the prime market. American housing would, unfortunately, still have lots of props—agencies such as the Federal Housing Administration and subsidies like tax relief on mortgage interest. But the GSEs should go.
For more, see Unnecessary Evils by A, July 22, 2010, at The Economist.
No comments:
Post a Comment