Are You Ready To Be Saved Again?

Our President said he wants Congress to close Fannie Mae and Freddie Mac, the most spectacularly failed government subsidizers of home mortgages. That’s a bit like Hitler closing Dachau; you have to applaud the notion but it leaves you wondering what’s going to happen now to the Jews he hasn’t murdered yet?

A little history helps. Few could afford homes before the Great Depression, mortgages as we think of them didn’t exist yet. The Democrats put the government into the homebuyer subsidy business in 1934, creating the Federal Housing Administration (FHA) and home mortgages for an unheard-of 15 years, gradually stretched to the 30 years we take for granted. The Federal National Mortgage Association (Fannie Mae) was added in 1938 and the Federal Home Loan Mortgage Corporation (Freddie Mac) in 1970. All of these were designed to relieve private lenders of long term loans so that they could re-lend the money instead of sitting for long periods with tied-up assets. Few observed that the taxpayers were functionally being tied up instead.

Economists speak of ‘moral hazard’ by which they mean what we call ‘too big to fail.’ That’s a rich guy for example, that doesn’t promise to pay of his kids’ debts but everyone assumes that he will, so the kid gets loans he shouldn’t, loans you or I can’t get, due to the implicit guarantee. Fannie and Freddie being government progeny, were considered failure-proof; lenders in their programs took risks they normally wouldn’t have taken. That proliferated American housing and in tight times, American housing market crashes when too many marginal borrowers couldn’t pay.

In 1968, with the Viet Nam War to finance, Fannie Mae and its debt were ‘privatized’ – sort of – to get it off the government’s books. Freddie went that route in 1989.

Congress legislated favorable loans for low income homebuyers in 1978 with the Community Reinvestment Act, the banks obeyed and then handed the risk off to Fannie and Freddie. Senator Chris Dodd (D) and Congressman Barney Frank (D) famously ‘encouraged’ banks to comply and the subprime (high risk) mortgage crisis of 2008 was born, leaving Fannie and Freddie huge bad debt obligations to pay. As all know, they were bailed out by taxpayers (that ‘moral hazard’) but also taken back into government management.

Not so may know that, as that Community Reinvestment Act remains, Fannie and Freddie returned to enabling high risk policies, to help the housing recovery. That reminds of a surgeon whose kidney removal hasn’t helped his patient, removing the other kidney.

So why does our elected leader, the President, wish to dump these two mighty sources of pro-Democrat low income voters? Well, you know what he’s saying — it’s to protect the taxpayers from a future housing bust. He wants to avoid having to use the voter’s money to rescue them again from the bad debt his managers have run up yet again, when it hits the famous fan. Noble, no?

But we remember when President Johnson, (D) needed to dump them and their debt so he could spend more on his war. And we remember that they were dumped with invisible (moral hazard) strings attached and we ended on the hook anyway. Hmnn…

We know that truly privatized, mortgages won’t be cheap anymore after our current experience, and the standard 30 years might even start to shrink to shorter loans. Will the Democrats actually do that, urged by a Democrat-on-steroids President? You decide.

And of course, Our Boss is saving us from Fannie and Freddie. Nobody’s mentioning The Federal Housing Administration (FHA), the Federal Home Loan Bank (FHLB), the Government National Mortgage Association (Ginnie Mae) or even the Veterans’ Administration home loan program.

Do you feel financially safe yet? Maybe for the moment, Congress isn’t in session…