Frank Seeks To Abolish Fannie And Freddie

Somehow, this article escaped my gaze on Friday. The extremely influential Financial Services Committee Chairman Barney Frank (D-MA) says that he wants Fannie and Freddie abolished. This is a interesting assertion from Frank, of all people. He has been widely criticized by conservatives as too supportive of the government-sponsored mortgage companies. Let's look at exactly what he said.

According to the National Journal's CongressDaily:

"I believe the remedy is abolishing Fannie Mae and Freddie Mac in their present form and coming up with a whole new system of housing finance," Frank said.

Here, here! I've been arguing for this for some time. It's nice to hear someone of Chairman Frank's stature and side of the aisle also seeing this seemingly obvious fact. Though, he claims this is no revelation:

"We're sorting out the function of promoting liquidity in the market and also the secondary market in general, and also doing some sort of subsidy for affordability. I do not think they should be necessarily combined," Frank said. "I don't think [I know] anybody who thinks Fannie and Freddie should continue as they are. ... I'm surprised anyone thinks that's news."

First here's why it's news: because of the few thousand pages of financial reform proposals making their way through the chambers of Congress, none address Fannie and Freddie. So if Frank doesn't think "anybody" believes Fannie and Freddie should continue as they are, why has nobody offered a solution to wind down the troubled quasi-public firms? Shouldn't that be a part of financial reform, given that many economists believe that Fannie and Freddie had a major role in the financial crisis and cost taxpayers billions?

I sort of agree with Frank's assertion. If the government thinks that some housing subsidy is desirable from a policy standpoint to encourage home ownership among poorer Americans, then it can establish a separate agendy for that. It would have an extremely small exposure and (I hope) no more than a few billion dollars in funding. In the meantime, it doesn't need another government-backed firm guaranteeing about half of the U.S. mortgage market.

But why would the government stay in the role of promoting liquidity in the mortgage market? The private market doesn't need Fannie and Freddie for liquidity. Assuming the securitization market comes back, that should be enough to account for ample mortgage origination funding. Indeed, all the existence of Fannie and Freddie did over the past decade was to ensure that the mortgage market had too much easy money, resulting in a bubble.

In any case, it's nice to see Frank state that he wants to wind down these awful institutions. I hope his colleagues will allow him to lead the charge in doing so. I just worry that, in the process, they'll create a new firm with another name, but the same intention to use government support for mortgage market liquidity. That, of course, would be a meaningless reform, as it would lead to precisely the same bad consequences as Fannie and Freddie.