29 September 2008
At the risk of saying “I told you so”, I predicted FNMA/FHMLC problems in 2004 and suggested solutions. Here’s the relevant text: The second part is the most valid.
Here are two possibilities:
- The government re-absorbs Fannie Mae and Freddie Mac. I rather like this idea, believing they should never have been privatized in the first place. A secondary mortgage market is a “public good” that requires extensive regulation — exactly the sort of thing governments do well, and private companies do poorly. The down side is that re-absorption would probably go with a huge financial “prop” to finance the transition. That money would come from the general fund, forcing the poor (renters) to pay once more for follies of the rich.
- New secondary mortgage markets emerge. Other financial markets (such as stocks) have become commoditized through electronic markets and small players. Why not mortgage-backed securities? The two big players really serve two roles: First, they set packaging rules to make loans more consistent and saleable. That needs a single, big player to set the standards — a role suited for government. Second, they act as matchmakers between buyers and sellers. This latter role is better suited to the electronic marketplace’s light touch than to a sasquatch like Fannie Mae.
Having said that, it’s essential that this market remain heavily regulated. The credit-card field — wildly underregulated — is a cesspool of scams and fraud, as is the phone-card field. The last thing we need is people losing their homes to oily salespeople with offshore mailing addresses and no accountability. I believe that anyone facilitating a secondary mortgage market should be licensed and bonded, with background checks, audits, unannounced site visits, and compulsory education. The cost for failure is too great.