Raj Date on Fannie and Freddie

Tim Fernholz rounds up the latest in the discussion of Fannie and Freddie, the Government Sponsored Enterprises (GSEs).

Barney Frank is trying to get rid of the implicit/explicit government guarantee, which is very hard to do in the current climate.

Alyssa Katz has an editorial in Politico where she points out the silence in terms of GSE policy, and walks through why it is important for the mortgage market post-crisis to get a sense of how the GSEs will work.

She alludes to this study by Center For American Progress, Principles to Guide Development and Regulation of a Renewed Mortgage Finance System.

I want to post this video of Raj Date’s presentation on the GSEs, taken from our report. I think he got to the heart of the problem: an institution can provide liquidity, or an institution can extend credit, but it can’t do both very well. Liquidity, especially in the mortgage-buyer-of-last-resort sense that the GSEs were doing it, requires explicit/implicit taxpayer backing. And having explicit/implicit taxpayer backing is the absolute worst way to build a credit engine that works, since the debt market isn’t going to be engaged enough to keep the firm in line. You have to pick one goal.

Here’s the video, it’s a great presentation:

I think, with extensive securitization reform, the GSEs could be setup in such a manner to allow for liquidity provisioning, and I, in theory, have no problem with them absorbing interest-rate risk for American consumers (the GSEs were the main reason you can get a fixed-rate mortgage). But why does that need to be a public company? And how can they do a good job providing credit over an extended period of time? That’s the heart of the problem.

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One Response to Raj Date on Fannie and Freddie

  1. sraffa says:

    I agree with Frank that the government guarantee of Fannie and Freddie should go. Why should taxpayers subsidize homeownership through guarantees of Fannie and Freddie? It’s just another piece of the massive wasteful subsidies to homeownership in this country.

    The bailout of Fannie and Freddie is going to be the most costly, and how have we benefitted? The private market will still provide mortgage financing, but at slightly higher, market interest rates if they’re abolished. What’s wrong with that?

    It comes down to this- what other government priority is less important than home ownership? Health, Education, Social services and even defense seem more worthwhile.

    Let’s look at some numbers:

    ‘The Congressional Budget Office estimates that Fannie and Freddie added $291 billion to the federal deficit in 2009 and will cost an additional $389 billion to run over the next ten years.”

    That makes 680 billion dollars of debt for Fannie and Freddie. or 0.68 trillion. Worth it? For what, increasing the homeowner rate a few percent? Inflating the housing bubble?

    I understand the reason for having GSEs in 1938, but post WW2, they should have been privitized. In the meantime, every American reading this can enjoy their $2,260 share of the national debt from Fannie and Freddie.

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