Fannie Phase-Out Proposal Weak on Details

Published February 23, 2011

The Obama administration’s proposal to reduce or end the influence of Fannie Mae and Freddie Mac in the nation’s housing market has drawn a decidedly mixed response among economists and public policy researchers, including Arnold Kling, who posted at his EconLog blog:

“I cannot believe that such a sketchy, half-baked proposal was given an official seal (two of them, one each from HUD and Treasury). My first reaction was that this was like a bad term paper from a public policy grad student. I was close.”

Kling is an economics professor and associate of the Mercatus Center at George Mason University. He formerly worked as an economist for the Board of Governors of the Federal Reserve and senior economist at Freddie Mac.

Professor, Grad Student Influence
Kling noted the proposal closely resembles one written by a Harvard Business School professor and a doctoral candidate in Harvard’s economics department.

“So, basically, the Administration outsourced its policy on the entire future of housing finance to a professor and a grad student, neither of whom appears to have spent a single day working in the mortgage industry,” wrote Kling.

The California Association of Realtors and National Association of Realtors defended Fannie and Freddie.

‘Mortgages Less Available’
“A reduced government presence in the mortgage market will raise the cost of homeownership and make mortgages less available,” said C.A.R. President Beth L. Peerce, in a statement. “Moreover, Congress needs to understand that during economic downturns, the housing market needs government involvement to ensure capital stability. History has shown the private market is incapable and unwilling to step in during the hardest of times and meet the demands of the nation’s home buyers.”

The statement added, “C.A.R., along with the National Association of REALTORS®, believes that Fannie Mae and Freddie Mac government-sponsored enterprises (GSEs) should be converted into government-chartered, non-profit corporations. Such an entity would ensure government’s role in a stable real estate finance system, while eliminating the conflict created by the GSE’s current charter allowing for a private profit and public loss structure.”

Three Options
The administration proposal offers three options: Nearly end government involvement in the loan market; have government involvement only in times of economic stress when private lenders significantly tighten lending; or create private companies to buy mortgages and sell them as securities with explicit government backing.

Economics Professor Robert Ekelund, Lowder Eminent Scholar Emeritus at Auburn University, said he believes “it is a good idea to gradually phase out Fannie and Freddie, with loan limits and better quality—10 to15 percent down—required in the short run. And yes, this would have an influence on the cost of credit over the short and long runs.”

But Ekelund added, “Fannie and Freddie were only part of the implosion.” He also blames “the loosening of restrictions on instrument issuance by commercial banks and financial institutions. . . . The problem is this Wild West banking continues.”

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Finance, Insurance & Real Estate Policy News.