Mortgage markets

When in 2008 the breadth and depth of the real estate collapse was realized, there were plenty of critics who placed a large percent of the blame on the government. Never mind that George Bush had encouraged home ownership as a way to participate in the wealth accumulation that a strong economy was making possible, now it was the other party, critics said, that had pushed home ownership on too many families who could not afford it.

Front and center, as examples of misguided leadership, were the quasi-governmental entities Fannie Mae and Freddie Mac. Critics pointed to high managers’ salaries, lax oversight and bad judgment. Fannie and Freddie have to go, critics said.

That was then.

Fannie Mae and Freddie Mac were created in the 1930s and in the 1960s to support mortgages of somewhat doubtful financial strength. Banks could pass on loans that exceeded their own tolerance for risk while satisfying somewhat marginal home buyers. It was a time when most mid- and small-sized banks kept the mortgages they sold, collecting monthly principle and interest, and Fannie and Freddie were important to expand the home-ownership market.

By the late 1990s, the rush was on. Fannie and Freddie were willingly accepting large numbers of mortgages of all qualities and packaging them for sale. They were handy buyers, allowing banks to make further loans. And, their managers were caught up in the same mortgage-creating frenzy as the mortgage lending specialists and big banks. As mortgages collapsed, it required an infusion of $188 billion to keep Fannie and Freddie afloat. After reworking some mortgages, and mostly better times, the two have so far returned more than $200 billion to the government.

Six years later, demands have shifted 180 degrees: Today, there is a desire to keep Fannie and Freddie just as they are. Why? Because secure mortgages have returned, the lending industry is profitable, and the low-interest rates that the very large Fannie and Freddie make possible favor continued mortgage borrowing.

Members of both parties in Congress are hearing from business interests to tread gently, or not tread at all.

A story in The Wall Street Journal last week describes the turn of events. While the White House tries to deliver on structural changes that could make it less likely for Fannie and Freddie to falter in the event of another mortgage collapse, it is running up against those who favor the return of the lucrative status quo. An alternative to Fannie and Freddie, which their critics demanded immediately after 2008, would be to end the quasi-government mortgage support entities and to have private-sector financial institutions take their place and create government-backed securities. The fear now, however, is that the private sector could easily want higher interest rates. And, for those who want lower-income families to be able to purchase a home (in other words, return Fannie and Freddie to their original mission), a possible reduction in the size of that segment of home buyers.

In the Journal story, Treasury Secretary Jacob Lew is quoted as saying that Fannie and Freddie are “one of the pieces of unfinished business” from the mortgage-market collapse.

That it is so difficult to make substantive changes to large components of the financial markets when all is well is perhaps not surprising, although 2008 was not that long ago. Money is now being made, and memories of the extraordinary financial uncertainties of six years ago are fading into history.

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