Why fannie and freddie may never die

And Lehman Brothers declared bankruptcy. But in each case, taxpayer liability and risk were minimized by the forced merger or the bankruptcy. As was only right, since the companies were owned by shareholders. Private benefit, private risk. Fannie and Freddie were also shareholder-owned, but the implied public subsidy always put taxpayers at risk. When they needed to be bailed out, taxpayers took on all the risk. Investors and executives had gotten the upside.

Taxpayers were on the hook for the risk. In addition, in September , the government acquired warrants to purchase, for a nominal amount, These warrants are likely worth many tens of billions of dollars more. This has been a great financial trade overall for the U. Treasury and therefore for taxpayers. But again, almost accidentally and at high risk to taxpayers. The stated goal of the Federal Housing Finance Agency, the conservator and regulator of the companies, is that they would exit conservatorship and resume business as completely private entities.

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Dow Jones. Opinion Read the Latest. To Read the Full Story. Given the risks implied by the current proposals, one would think that Americans would want to know more about what is happening to home finance or, more specifically, the price of their homes. To date they are not interested — and neither is the media. It is probable that the housing industry in the United States is the nation's most subsidized sector.

The problem, of course is how do we get from the most heavily subsidized system of home finance in the western world to a system that is not subsidized at all? Clearly if the transition is not handled properly, major dislocations will emerge and these dislocations will be very painful to all Americans.

If the current plan from the U. Treasury clears Congress and the courts, two things will happen: Fannie Mae and Freddie Mac will stop functioning on January 1, ; they will then enter a liquidation phase that may take at least 10 years. This will not be good for anyone in this country. If there is no Fannie Mae and Freddie Mac, no bank will be willing to make or year self-amortizing mortgages.

I have spoken to at least a dozen banks who feel very strongly about this issue — they just don't view mortgage lending as the profit center it once was in the past. It's more of a loss-leader to attract customers and cross-sell them other products. Read more : Dick Bove bullish on banks after stress tests. Banks will simply be unwilling to put year self-amortizing mortgages on their balance sheets, particularly at today's interest rates.

They will be willing to make and year adjustable-rate loans. The math here is frightening. Under the new qualified mortgage rules, if you want to buy a home:. So, if the homeowner obtains a year mortgage at a 4. Conversely, if all they could get was a year adjustable-rate mortgage at 6.

You can play with the numbers any way you want but the bottom line is always the same: Affordability drops. Housing prices must come down.