Fannie and Freddie: A Review

Peter Wallison has a nice review of the possible future for Fannie Mae and Freddie Mac. A prior piece of his from 2005 ended as follows (discussing possible Congressional legislation):

The Critical Final Step

After years of trimming around the edges of the GSE problem, Congress--with the help of Chairman Alan Greenspan--has finally come to the nub of the issue. If Congress can bring itself to overcome the furious political opposition of the GSEs and their supporters, it will direct the new GSE regulator to reduce the size of Fannie's and Freddie's portfolios and endorse a workable standard by which to measure the proper size of the smaller portfolios that result. This will solve, finally, the problem of two entities using their implicit government backing to control the residential mortgage market, which creates massive risks for the taxpayers and the economy in general.

If Congress cannot take this essential step, however, no amount of additional authority--given to a purported "world class regulator"--will significantly change the course of events. Fannie and Freddie will continue to grow, and one day--as Alan Greenspan has predicted--there will be a massive default with huge losses to the taxpayers and systemic effects on the economy. We should be grateful that Congress finally has before it a serious proposal that is equal to the seriousness of the problem. But we should also worry about whether Congress can find within itself the political will necessary to see the task through to its logical conclusion.

Pretty good.

Here is a link to the PDF of his current writeup, titled The Dead Shall Be Raised: The Future of Fannie and Freddie.

It's a full-length write-up, but the abstract and conclusion may be sufficient for many readers. Here is the abstract:

The renewed interest in Fannie Mae and Freddie Mac is premature. They are currently the mainstays of the U.S. housing market--more important now than they were before being placed in a government conservatorship in September 2008. Many observers do not believe the two government-sponsored enterprises (GSEs) can survive the immense losses they will cause taxpayers, but this is far from true. For Fannie and Freddie to be eliminated, a new mortgage-financing system must take their place, but there is not even a hint of a replacement on the horizon. Once the housing market recovers, the GSEs will still be the only game in town, and supporting them will continue to be the course of least resistance for Congress. Moreover, it will not be easy to implement any of the alternatives to reestablishing Fannie and Freddie as GSEs. Nationalizing or reorganizing them as public utilities would both have significant drawbacks, while privatizing the GSEs--the most sensible approach--would require a major change in public attitudes about securitization. Sadly, in the absence of viable alternatives, their restoration as GSEs seems the most likely outcome.

When talking heads comment on debt-to-GDP ratios and similar metrics, they are often shilling for their own interests. Not only do they generally ignore unfunded liabilities such as Social Security, they assign a present value of zero to this sort of GSE obligation.

The U. S. once had a Federal Government that was serious about financial responsibility. Those days are long gone. One way or another, however, bookkeepers and accountants have their day. The road down which cans get kicked is not smooth, straight and downhill forever.

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