Americans are little aware of how much they rely on federal assistance to help pay for a home. No longer. The mortgage crisis has finally caught up with two government-backed giants in home finance. Once the crisis passes, it may be time to further privatize the American Dream.
Investor panic has fallen over both of the federally chartered private enterprises known as Fannie Mae and Freddie Mac. Their stocks have tumbled as some experts question whether further drastic drops in house prices may sink the two into enough red ink to force a government bailout.
The implicit guarantee of federal backing for Fannie and Freddie, combined with the millions they have spent to lobby Congress for favors, have given them an outsized advantage in the mortgage business, reselling the loans to global investors. They are allowed to borrow easily and keep very little money on hand compared with their competitors. As a result, they own or guarantee about half of the country's $12 trillion in mortgage debt.
They are socialist instruments holding great sway over private finance from Wall Street to Main Street, having built up powerful allies among home builders and real estate agents to keep it that way.
So far in the past year, the two have lost more than $100 billion in value. A full bailout could cost taxpayers as much as the Iraq war, or more. To stem further losses, the US Treasury is aggressively working to find ways short of a bailout to rescue them, such as injecting fresh capital to help them ride out the mortgage storm.
If these efforts work, Congress must then begin to shrink these entities to avoid further financial panic, not to mention a potential economic disaster. The reason is simple: They have outlived their Depression-era purpose of greasing the mortgage business for low-income home buyers by repackaging loans as securities. The market for that is now well developed. And at best, the two help lower mortgage interest rates by only about a quarter point.
When the housing market is doing well, Fannie and Freddie are not needed, and in fact they helped create the recent housing bubble whose implosion now touches them. When markets tank as badly as now, even the well-vetted mortgages that the two purchase are in jeopardy and are only as good as government credit.
They've gone way beyond their mission of helping the poor and are now backing loans for the wealthy. Congress has made the mistake of continuing their existence in the belief that house prices will only keep going up and that homeownership is a social good worth the risk of a massive taxpayer bailout.
The troubles for these hybrid public-private entities show how risky it is for government to have a strong hand in running any business. Normal markets should allow businesses to fail. That helps improve the economy. But the political pull of Fannie and Freddie won't let that happen in their case. In fact, the two only grow bigger.
Recent accounting scandals at the two enterprises revealed how a presumption of invulnerability crept into their operations. The task for Congress is to help Fannie and Freddie slowly shrink to minor roles strictly for the poor, saving the economy from their possible collapse. Long-term stability in homeownership demands it.