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What To Do With Fannie and Freddie

Washington is quiet, but that does not mean it is dormant. Staffers on the Hill and in the Treasury Department are working on a plan to restore normalcy to the

Jul 31, 2020
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Washington is quiet, but that does not mean it is dormant. Staffers on the Hill and in the Treasury Department are working on a plan to restore normalcy to the mortgage market and to fix Fannie Maeand Freddie Mac, the government-sponsored enterprises that buy up mortgages from lending banks, providing liquidity to the housing market.
The New York Times has a series of op-eds on the subject, and taken together, they are a good primer on the intractable problems facing legislators. Take this argumentfrom the former president of the St. Louis Federal Reserve Bank, William Poole, advocating for total phase out of Fannie and Freddie:
If the home finance market were fully private, then it would bear the losses from its own mistakes in pricing and insurance. The proper government role is regulatory oversight and not direct operation of financial firms. Fannie and Freddie could not be shuttered immediately; they are too large. A sensible transition plan would have them stop buying new mortgages, and their portfolios would decline as the mortgages they own are paid down. Within 10 years, the portfolios would shrink to insignificance.Their securitization business, whereby they purchase mortgages and issue securities against them, should likewise be wound down. A practical approach would be to set a gradually rising schedule of fees, motivating private companies to enter the securitization business. In 10 or 15 years, the companies would be gone, closing a chapter in American financial history that enjoyed considerable success but ended very badly and at great taxpayer cost.
The problem is, were the government — via Fannie, Freddie and the Federal Housing Administration — to stop buying mortgages, it would crater the housing market. The government currently backs 19 in 20 new mortgages. A decade seems far too short a time frame for pulling out, given how weak housing is.
Camilo Wood

Camilo Wood

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Camilo Wood has over two decades of experience as a writer and journalist, specializing in finance and economics. With a degree in Economics and a background in financial research and analysis, Camilo brings a wealth of knowledge and expertise to his writing. Throughout his career, Camilo has contributed to numerous publications, covering a wide range of topics such as global economic trends, investment strategies, and market analysis. His articles are recognized for their insightful analysis and clear explanations, making complex financial concepts accessible to readers. Camilo's experience includes working in roles related to financial reporting, analysis, and commentary, allowing him to provide readers with accurate and trustworthy information. His dedication to journalistic integrity and commitment to delivering high-quality content make him a trusted voice in the fields of finance and journalism.
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