Fannie and Freddie Mac Going Away?

The recession of 2008, precipitated by the collapse of the subprime mortgage bubble, may be officially over, but economic growth remains anemic and is producing virtually no job growth. We must stimulate the moribund housing markets. Yet in the past three years, there has been no progress on the housing front, and Washington policymakers seem bereft of ideas for turning things around.

They argue this will eventually lead to getting the government out of the mortgage business.

It’s not clear how increasing fees charged by Fannie and Freddie will encourage the government to wind down these agencies. Moreover, raising mortgage fees in the midst of the worst housing slump since the Great Depression will not stimulate housing or job creation. We need a clear path for eliminating Fannie and Freddie over time.

Subprime mortgages have existed for decades. But they were a small percentage of the mortgage market (well under 10%), until Fannie and Freddie reduced credit standards to increase market share and meet low-income and minority home ownership targets mandated by Congress. By 2007, nearly 50% of all mortgages that originated in the U.S. were subprime, with Fannie, Freddie and other agencies guaranteeing about 70%.

Without these government guarantees, the subprime bubble and the resulting financial crisis would never have happened. Bank regulators and industry experts warned Congress for decades about Fannie and Freddie and their increasingly large and risky portfolios.

Because Congress failed to act, nearly the entire developed world is suffering from the mortgage-induced recession. Taxpayers are on the hook for hundreds of billions of dollars of losses at Fannie and Freddie — dwarfing the losses from banks, Wall Street, auto companies, insurance companies and all other bailouts combined.

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