Arnold Kling  

How Government Used Fannie and Freddie

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Russ Roberts writes,


Congress designed Fannie and Freddie to serve both their investors and the political class. Demanding that Fannie and Freddie do more to increase home ownership among poor people allowed Congress and the White House to subsidize low-income housing outside of the budget, at least in the short run. It was a political free lunch.

In 1968, President Johnson had Congress create the Government National Mortgage Association and sell Fannie Mae to private investors. The reason for these actions was exactly the same as the reason that Enron created Special Purpose Vehicles: to get liabilities off of the balance sheet and hide risk.

Before GNMA and while Fannie Mae was a government agency, the National Debt included all of the money borrowed to finance mortgages bought by Fannie or insured by the Federal Housing Administration (FHA) and under special programs for veterans and military families (VA). President Johnson was embarrassed to ask for increases in the ceiling on the national debt at the time when we were fighting an unpopular war in Vietnam. Moving government housing programs to off-balance-sheet entities served that purpose. GNMA sold pools of FHA and VA mortgages, reducing government borrowing. Spinning Fannie Mae off to private investors took Fannie's debt off the government books.

In 1970, Congress created Freddie Mac, and eventually spun it off as it had Fannie Mae. However, the separation of Freddie and Fannie from the government was never clearcut. They continued to serve as vehicles for implementing federal housing policy, as Roberts documents. Ultimately, as with Enron's SPV's, when things started to go sour it turned out that Fannie and Freddie had never really left the government's balance sheet.


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Frejus writes:

Seems like the attention conservatives and libertarians focus on Fannie and Freddie ignores the systemic problems our financial system faces.

spencer writes:

And it was just two years ago that Russ Roberts was arguing that the increase in home ownership was evidence of how living standards were much higher than the other data showed.

Jamal writes:

The biggest problems our economic system faces are caused by the government trying to "social engineer" society. It is time we draw a line between what in life is a right and what is a priviledge. And for starters home ownership is a priviledge, not a right!

EndMathAbuseNow writes:

Can those who want to blame the CRA and Fannie and Freddie for the mess explain the following:

1) If the CRA were at fault and market's purely efficient, then why were many of the players in trouble (Countrywide, Lehman, Bear, Northern Rock, Hypo) not covered by the CRA. The answer that some of these players may have originated or packaged loans at the behest of a CRA covered institution doesn't fly; in an efficient market they would not retain any of the risk of underpriced CRA loans, even if they were providing origination services for CRA lenders.

2)If Fannie and Freddie were at fault, then why did the big increase in subprime lending occur when the GSE market share was declining? Also explain how the damage was primarly in sectors dominated by private label securities.

3) Explain why in early 2008 the crises in Jumbo loans--too big for the GSEs and by definition not for low income borrowers--was so severe as to generate political pressure to allow GSE and FHA entry into this market.

4) Describe the CRA mandated investments made by banks in the U.K, Iceland, Germany, and the Netherlands.

5) Finally: on some of the failed institutions, please quantify the loan losses from CRA or Housing Goal mandated loans and those from other loans.

Dave Two writes:

To what extent did the repeal of the Glass Steagall Act of 1933 - in 1999 have anything to do with the present day meltdown?

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