(cross-posted with Benzinga.com)
The risks to Fannie and Freddie are governmental, not financial. The government could decide to do extremely destructive things to Fannie and Freddie.
The risks to a privatized Fannie and Freddie (by whatever name) are even greater. If the existing systemically dangerous institutions (SDIs) became private label securitizers they would have all the perverse risks that come from modern executive compensation. They would pose a systemic risk if they were to fail – which is why regardless of how much the government promised not to bail them out no one would believe it. That is why they would be GSEs regardless of their official designation. The more they are perceived as GSEs the greater the political risk that Congress will demand dangerous actions from the private label securitizers.
It is not clear why the administration believes that securitization of mortgages is necessary or even desirable. Portfolio home lenders will face prepayment and interest rate risk, but those risks are simply transferred, not removed, by securitization. Given what we have learned from the crisis, the assumption that securitization leads to an efficient distribution appears baseless. Some banks will doubtless fail if interest rates increase sharply and remain high for many months, but hedging and macroeconomic policy can greatly reduce the failure rate among banks.
The first step, however, should be to make the existing disaster that is Fannie and Freddie fully transparent. We need to investigate fully what went wrong. If Fannie and Freddie put all their information on the web we could bring the wisdom of the masses to bear and determine the truth. There is no reason why Fannie and Freddie should have broad proprietary secrets.
"Administration officials will have an overpowering desire to claim that their brilliance cut Fannie and Freddie's costs in half. Collectively, this will provide powerful incentives to continue Fannie and Freddie as a huge governmental enterprise."We need to understand why Fannie and Freddie became massively insolvent. It wasn't because they were governmental, but because they were private."Fat chance we make that mistake again! 😉
I see no reason why these entities should not be fully public. The private sector hasn't had much positive effect on lending standards or discipline. All of the standards in the mortgage market were developed well before the GSEs were spun off. The private sector has been innovative to an extent with respect to the hedging of interest rate risk, but hedging activity is really just a transfer rather than an elimination of risk.I don't really see Fannie and Freddie as promoting home affordability. You can subsidize the interest rate, but that just pushes up the price of property. Like a bond's price and a bond's coupon, if one goes down the other must go up.The real value of a government mortgage guarantee is that it assures a functioning mortgage market at all times, even in the worst of financial panics. No matter how temporary, Americans would never put up with a mortgage market collapse, and for that reason a government mortgage guarantee makes sense.But once the government guarantees a mortgage, there is absolutely no point in allowing private capital to participate. If investors want risk free alternatives, then they can buy Treasuries. The same goes for the executives at Fannie and Freddie, who enriched themselves despite what is now a record of net losses over the history of the "private" enterprise.We can keep everything else more or less the same with the exception of kicking all of the private capital out. Perhaps a deal can be struck which swaps the current private capital out for Treasuries. The new "executives" at the government mortgage guarantee agency can earn what FHA management does.The real questions for the GSEs are more related to the public purpose. Should the government subsidize $700,000 homes for the wealthy? Should we subsidize new home construction out in the middle of the desert while our existing stock of homes in the inner-cities rots? And what about energy efficiency and proximity to transit? Private capital doesn't help address any of these real issues.
"Fannie and Freddie play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their role in the housing market is particularly important as we work through the current housing correction. The GSEs now touch 70 percent of new mortgages and represent the only functioning secondary mortgage market. The GSEs are central to the availability of housing finance, which will determine the pace at which we emerge from this housing correction. …OFHEO has reaffirmed that both GSEs remain adequately capitalized. At the same time, recent developments convinced policymakers and the GSEs that steps are needed to respond to market concerns and increase confidence by providing assurances of access to liquidity and capital on a temporary basis if necessary."home buyer