Reforming The Mortgage Consuming Monsters

The Wall Street Journal contains an interesting analysis piece today explaining several possible ways to reform the government-sponsored entities Fannie Mae and Freddie Mac. Here's the challenge, according to the WSJ:

A reformed hybrid model would need to provide private shareholders with the prospect of returns. But it also can't distort the housing market over the long run and, in times of stress, leave taxpayers footing the bill.

Let's think about the options the article presents.

Just Guarantee Mortgages

Here, the agencies go private again, but would not purchase giant portfolios of mortgages. Instead, they would just guarantee them. The WSJ explains a problem with this plan if it hopes to spur investor demand:

To cause such demand, the government might have to provide a backup, explicit guarantee on the securities to cover the risk that the private guarantors can't pay up. It provides a similar backstop on securities from another guarantor, Ginnie Mae.


But such a commitment could again encourage excessive risk taking. To prevent that, the new privately owned guarantors would likely have to operate under stringent regulation. But too many restrictions and private shareholders walk away.

Right. Taxpayers might also have a problem if Uncle Sam backs up their guarantees. Those guarantees would leave taxpayers with all the risk, but without the reward they would get if the agencies owned the mortgages and their profits went, at least in part, to the government. I suppose they could have a depository insurance-like setup, where banks had to pay a premium for that guarantee, but then you run into the question of whether or not the agencies are charging enough for that guarantee. I doubt that they would.

Keep Them Public

Or, says the WSJ:

Another option is to avoid the private angle altogether, and provide more guarantees through the Federal Housing Authority, an arm of the government. The potential drawback: The FHA may lack the efficiency and controls to scale its business.

Right. At least if private, there's a chance that potential losses could bother them. With a blank check from the government, I find it even less likely that risk would be curbed.

Kill The Monsters

Then, there's my favorite option: when something is fatally wounded, put it out of its misery. The WSJ suggests:

Perhaps it is actually time to move in the opposite direction -- and scale back government involvement in the housing market.

Concluding:

What's more, government support may have helped push house prices to artificial highs, which might actually have worked against broadening homeownership.


It is time to slay not only monsters in Washington, but also some sacred cows.

I couldn't agree more. I am completely unclear why the mortgage market needs to be propped up by government-sponsored agencies in the first place. Let private banks or investors take on the risk for mortgages -- just like they and finance companies do for credit cards, auto loans and most other consumer debt. Banks can obviously profit off mortgages. They did before Fannie and Freddie, and they can after the agencies are gone.

The American dream may be to own a home, but it's also to live in a healthy, functioning economy. I think we've all seen the how dangerous it can be for the government's to become too involved in the mortgage market. Why continue to repeat the mistake?