Greg Ip

Articles by The Economist’s U.S. Economics Editor

Fannie Mae and Freddie Mac: Return of the toxic twins

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Mel Watt wants easier credit for homebuyers. What could go wrong?

May 17th 2014 | WASHINGTON, DC |

THEIR reckless investments helped inflate the housing bubble. Their collapse in 2008 triggered a government takeover and a costly bail-out. Many people would like to see Fannie Mae and Freddie Mac, America’s twin mortgage giants, abolished. But their new regulator wants the two firms, which guarantee 55% of new American mortgages, to promote easier credit—again.

Mel Watt, a Democratic ex-congressman, took over as boss of the Federal Housing Finance Agency (FHFA) this year. He replaced Ed DeMarco, who had focused on shrinking the twins and recovering the bail-out cash. On May 13th Mr Watt signalled a break with all that.

The maximum size of a Fannie or Freddie-backed loan, rather than shrink, will stay the same: $417,000 in most areas, and $625,250 where housing is pricey. The fees the twins charge to guarantee loans, rather than rise, will for now stay the same. Most important, Mr Watt clarified and narrowed the conditions under which banks which sold Fannie and Freddie dodgy mortgages would be forced to buy them back. Mr DeMarco had relentlessly pursued such “putbacks”, scaring banks into denying credit to all but the best qualified borrowers. “I don’t think it’s FHFA’s role to contract the footprint of Fannie and Freddie,” Mr Watt said. Together, these steps offer a modest fillip to home sales and construction.

While in Congress, Mr Watt pressed Fannie and Freddie to funnel more credit to relatively poor families, a well-meaning policy that did not end well for those families. He has now given the twins—and their mission of boosting home ownership—a new lease of life. But he will not restore them to their former power. He still wants private capital to replace the public sort in the mortgage market, and has told the twins to accelerate the transfer of default risk to private investors. He declined to write down mortgages to prevent foreclosures, or expand a programme to cut some borrowers’ mortgage rates. And he stressed that he would stay out of the debate over the final fate of the twins, which is up to Barack Obama and Congress.

Mr Obama and Republicans agree that the twins should be shuttered, but differ as to what should replace them. A Senate bill would let private investors bear most default risk but create a new federal guarantor of last resort. That thrills neither liberals (who want more low-cost housing) nor conservatives (who hate federal backstops). So Fannie and Freddie will live on, for now.

The original article is linked here.

 

 

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Written by gregip

May 15, 2014 at 1:00 am

Posted in Uncategorized

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