Did Fannie and Freddie Pocket the Subsidy Money They Have Been Given ?
Is there any need for them anymore?
I personally believe there needs to be some quasi public version of Fannie and Freddie out there. As the debate matures about how to phase them out I am someone who does not trust BIG banks and the market to do the right thing and allow lower down payments and more flexible debt to income ratio’s to allow for inner city sales to be healthy. Just watching how lenders are not going into modifications of loans with vigor (my opinion based on HAFA results) and how they act and react during short sales I think lenders are not thinking “how do I do right by this community, this market”. I think SMALL community banks will do the right thing but not larger ones—and unfortunately larger ones dominate the market.
So where do you stand on phasing down Fannie and Freddie?
Are you making the snap judgement that they should “do away with them? They created all this mess”?
I caution you to not be so hawkish on getting rid of Government’s role in the mortgage business because it’s already a deep part of our housing market.
There are 1.5 trillion in mortgages made every year—almost all of them backed/guaranteed by the government. By 2010 over 85% of all new mortgages issued were through the U.S. Government (guaranteed by and/or through FHA loans).
If it seems odd to you that the government is involved in the mortgage business keep in mind that Fannie Mae was started as a Government agency. Now that the agency has been taken over by the government again (as the Great Recession collapsed Fannie was absorbed) there is a lot of talk about closing it down or changing it to a mostly free market/non-government owned system.
They have an affordability mission.
Congress directed Fannie and Freddie, with goals to create affordable home ownership with lower down payment structures and flexible income ratio’s and loan products. The idea was that half the “government” loans would go to moderate to low income people.
This was based on the assumption that the “market” would not provide these mortgages at as favorable rates to lower and moderate income families.
The effort pulls on the heartstrings of voters to hear that mission. And, Fannie and Freddie have played it to the hilt. This role has been critical in each person, each one of us, having the value and the dream of owning a home.
But Fannie and Freddie critics think that Fannie and Freddie has made not difference in the homeownership.
For example, Dwight Jaffee, an economist at UC Berkeley who has spent his career studying the U.S. housing market. Said, “All of the money and all of the tax benefits and all of the Fannie and Freddie costs … have come to zero in terms of having any observable effects on our home ownership rates…Our rates are the same as countries that have never put a penny of government resources into it.”
So how could Fannie and Freddie have taken a government subsidy and, according to Jaffee, produced no benefits?
“The shareholders of Fannie and Freddie and the employees of Fannie and Freddie pocketed every penny of the subsidy,” Jaffee says.
For more on this there was a NPR (National Public Radio) three part series you can link to: http://www.npr.org/blogs/money/2011/04/22/134863603/kill-them-bury-them-the-rise-of-fannie-and-freddie
Part of this blog posting were pulled from the NPR article.
