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  • Maybe a Giant Government Mortgage Financing Duopoly is Not in the Interests of American Homeowners

    When liberals in Congress sold the American people on the need to risk $300 billion to bail out banks that made irresponsible loans to bad credit risks, they insisted big government was the answer to the housing crisis. For example, when defending the bill Barack Obama told Tom Brokaw: “What we need is a floor in the housing market, a, a stop to the decline in housing values.” Well guess what? Big government intervention in the housing market is only fueling, not helping, the current housing crisis. The Washington Post reports today:

    Fannie Mae and Freddie Mac are giants of the mortgage finance industry. But to investors, they’re rapidly shrinking. And as they struggle, they’re taking the housing market with them, reinforcing a downward spiral in which their troubles translate into pricier home loans and increasing foreclosures, in turn further undermining the companies.

    About 70 percent of newly issued mortgages are owned or guaranteed by Fannie Mae and Freddie Mac. Without this financial backing, the banks and other lenders who typically make home loans would no longer be able to do so. The housing market could collapse.

    Freddie Mac, for instance, no longer finances no-money-down mortgages, nor does it continue to buy or guarantee mortgages given to people who have failed to document their finances. Fannie Mae has withdrawn from the market for all-day loans, which are considered risky because they require less documentation than traditional prime loans. As Fannie Mae and Freddie Mac tighten credit and the cost of borrowing increases, the housing market contracts.

    Deborah J. Lucas, a finance professor at Northwestern University, said the government’s rescue plan was designed to restore confidence in the companies and the financial markets, of which the mortgage market is a significant part. “The motivation for the bailout was to prevent that type of spiral,” she said.

    So far it has not worked out that way. “Their ability to lend is constrained by their insufficient capital, higher spreads and investor doubts about whether they will be allowed to continue to operate in a business-as-usual mode,” Lucas said.

    The problem isn’t too little government intervention in the marketplace. The problem is that government intervention created a housing finance market dominated by a government duopoly. If there was an actual competitive market, the fact that two firms were in financial trouble could not threaten the stability of the whole system. That is why Freddie and Fannie must be broken up.

    Posted in Ongoing Priorities [slideshow_deploy]

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