My solution to the Fannie Mae/Freddie Mac crisis… from 2004

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.

One reply on “My solution to the Fannie Mae/Freddie Mac crisis… from 2004”

Comments are closed.