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Timothy Geithner made it clear in a talk Tuesday that the U.S. government would remain involved in the mortgage market for the foreseeable future. The exact plan for what do with Fannie Mae and Freddie Mac has not been released yet, but economists hoping the two would ride off into the sunset are sure to be disappointed.
“Fannie and Freddie may change their names sometime in the next few years, but there seems to be little chance of fundamental reforms,” said Robert McDonald, a professor of finance. Part of the reason, he noted, is federal government’s extensive involvement in the mortgage market. In Fannie and Freddie, “We’ve created a Rube Goldberg contraption that will be almost impossible to dismantle easily,” he said.
U.S. housing policy is based on the premise that the market cannot accurately judge how much owner-occupied housing the country needs, McDonald explained, and that the government needs to subsidize housing via the mortgage interest tax deduction and Fannie and Freddie’s mortgage guarantees. “It’s not obvious this premise is correct.”
Part of the problem may be that Fannie Mae and Freddie Mac were created for a different era. Fannie was formed during the Great Depression to facilitate mortgage lending, which had stagnated. Since banks in those days kept mortgages on their balance sheets, they could only offer a limited number of the loans. Fannie’s purpose was to purchase mortgages from the banks, freeing up deposits for more loans. Freddie was a later addition, created in 1970 to compete with a then-privatized Fannie.
Overall, the securitization of mortgages has been a good thing, McDonald said. But because the mortgage market today is not what it was in the 1930s, he thinks the federal government needs to reevaluate its role in the housing market. The government certainly has good reasons to encourage homeownership—FHA loans guarantees and the mortgage interest deductions help provide the poor with proper housing, and there is an argument that owners are more involved citizens than renters. Still, he said the current system goes beyond what is necessary—mortgage interest deductions on million dollar homes, for example.
“Housing policy in the U.S. is a mess,” McDonald said. “It’s clear that government involvement didn’t prevent—and may have contributed to—the biggest housing meltdown in 80 years. We should be starting over.”