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Morning Bell: Time to End Fannie and Freddie

Posted By Mike Brownfield On July 14, 2011 @ 10:05 am In Economics | Comments Disabled

Four years after home values in America plummeted, fears over America’s housing market remain. In testimony before Congress yesterday, Federal Reserve Chairman Ben Bernanke cited “the continuing depressed condition of the housing sector” as one of the factors behind America’s sagging economy. In response to the poor market, the White House is reportedly considering [1] a repeat of the historically bad decisions that contributed to the mortgage meltdown rather than pursuing a much saner course: eliminating Fannie Mae and Freddie Mac.

In a town hall last week, President Obama remarked [2] that “the continuing decline in the housing market is something that hasn’t bottomed out as quickly as we expected.” So what’s he planning to do about it? The Wall Street Journal [1] reported Monday that the White House may have “taxpayer-owned mortgage giants Fannie Mae and Freddie Mac relax their rules for loans to investors” as one way to tackle the housing slump.

For those with short memories, Fannie, Freddie, and government policies aimed at making it easier for people to purchase homes is how the housing market wound up in its current state. And that state isn’t a pretty one. In the years since housing prices peaked in the second quarter of 2007, the value of household real estate has fallen by about $6.6 trillion—30 percent—and it continues to fall.

Housing and Urban Development Secretary Shaun Donovan takes a positive view of the market, claiming [3], “It’s very unlikely that we will see a significant further decline.” Not so fast. Bloomberg Businessweek reports today that analysts like Doug Ramsey of Minneapolis investment firm Leuthold Group take a dimmer view [3]:

The Dow took 35 years to return to pre-crash levels. The Nikkei trades at less than a third of where it peaked 22 years ago. ‘The housing decline,’ he says, ‘will be a long, multiyear process, and the multiplier effect across the economy will be enormous.’

How can we get back on course? The Heritage Foundation’s David John writes in a new paper [4] that “real recovery is not likely until both Fannie Mae and Freddie Mac are replaced by a new housing finance system that does not include government distortions of the market.”

In his paper, John explains the evolution of Fannie and Freddie—what he calls “two stories of government programs gone wrong.” Congress used the entities’ special status as government-sponsored enterprises to require them to meet affordable housing goals by issuing mortgages to lower-income and moderate-income homeowners. That policy, combined with Fannie and Freddie’s involvement in investing in and issuing mortgage-backed securities (including subprime mortgages), the housing market’s collapse, the entities’ resulting financial hardship, and the government’s move to take Fannie and Freddie into conservatorship, led to a housing market nightmare.

John says [4] that’s not a road America should go down again, and he lays out a detailed course [4] for how Washington can gradually end Fannie and Freddie while avoiding the disruption of the housing market’s slow recovery:

As the crash of 2008 showed, the old structure of housing finance was a spectacular and expensive failure. Allowing it to remain in place—or, even worse, recreating it—is the very last thing that homeowners or taxpayers need to bequeath to future generations. Instead, both legislators and the Obama Administration should work to structure a mortgage-finance system based in the private sector that has the flexibility to meet market needs while ensuring that mortgages still meet strict underwriting standards and protecting consumers from predatory lending practices.

Yes, America’s housing market is a problem. But the answer certainly is not recycling failed policies of the past. Creating Fannie and Freddie was a mistake. Now is the time to eliminate them.

Quick Hits:

  • President Obama abruptly walked out [5] of debt limit negotiations yesterday and reportedly warned House Majority Leader Eric Cantor (R–VA), “Don’t call my bluff.” Talks are scheduled to resume today.
  • Moody’s Investors Service says it’s reviewing the United States’ Aaa bond rating [6] for a possible downgrade amid continued friction in debt limit negotiations.
  • Federal Reserve Chairman Ben Bernanke says the Fed is “prepared to respond” with additional stimulus [7] measures if the economy needs it, though he believes the country’s poor job growth is due to temporary factors.
  • India has no immediate suspects [8] in yesterday’s three terrorist bombings that killed 17 people during rush hour in its financial capital, Mumbai.
  • VIDEO: Remember when cell phones cost a bundle? Not anymore, and it’s all thanks to capitalism. Watch the video on Foundry.org. [9]

Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2011/07/14/morning-bell-time-to-end-fannie-and-freddie/

URLs in this post:

[1] considering: http://online.wsj.com/article/SB10001424052702304584404576440033488980192.html

[2] remarked: http://washingtonexaminer.com/opinion/2011/07/housing-crisis-another-washington-groundhog-day#ixzz1S5CLvmcR

[3] claiming: http://today.msnbc.msn.com/id/43687588/ns/business-us_business/

[4] writes in a new paper: http://www.heritage.org/Research/Reports/2011/07/Free-the-Housing-Finance-Market-from-Fannie-Mae-and-Freddie-Mac

[5] abruptly walked out: http://thehill.com/homenews/administration/171403-obama-warns-cantor-dont-call-my-bluff-in-debt-talks

[6] reviewing the United States’ Aaa bond rating: http://online.wsj.com/article/SB10001424052702303406104576444003129534580.html?mod=WSJ_hp_LEFTTopStories

[7] “prepared to respond” with additional stimulus: http://www.latimes.com/business/la-fi-bernanke-economy-20110714,0,4198962.story

[8] no immediate suspects: http://www.time.com/time/world/article/0,8599,2083019,00.html

[9] Watch the video on Foundry.org.: http://www.foundry.org/2011/07/13/video-how-capitalism-makes-us-richer/

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