There has been an awful lot of discussion in the last couple of days about the fate of Fannie Mae and Freddie Mac, the government sponsored entities that have been providing liquidity to the mortgage market for decades. Thankfully, it appears more and more likely that these two black holes will be dismantled.
Yesterday morning the Treasury Department issued a press release on behalf of the Obama administration outlining their plan for winding down Fannie Mae and Freddie Mac. I won't regurgitate the entire proposal here (you can just as easily click on that link) but I will point out that the key concept is to start by more appropriately shifting the risk back to the homeowners and the mortgage market and away from the taxpayers:
- Phasing in more realistic risk based pricing for the insurance Fannie Mae and Freddie Mac are providing
- Reduce the conforming loan limits
- Requiring at least 10% down payment on loans guaranteed by Fannie and Freddie
What else can I say other than "brilliant"! We can argue about how much of a role these entities played in the whole mortgage meltdown but let's not forget that out of all the government bailout funds dispersed over the last couple of years the only funds that won't be recovered will be those provided to these two clowns. Even AIG, GM, and Chrysler will end up essentially returning all the taxpayer money they took. On the other hand the number I've seen thrown around for the cost of Fannie and Freddie to the taxpayers is a minimum of $150 B - non-recoverable and probably growing. In addition, it's not healthy that the government is now behind 90% of all new mortgages. That's not sustainable.
Invariably it will become harder and more expensive to get a mortgage but you know what? That's OK. The taxpayer can no longer afford to subsidize home ownership. And the impact on the housing market will probably not be good. In a totally biased and unscientific survey CNBC Squawk On The Street viewers were encouraged to take an online poll about whether or not 6% mortgage rates (we've been higher than that before folks) would kill their desire to buy their dream home. The results below (11 PM last night) show that it's about 50/50.
Obviously this might be a tough political pill to swallow but if this administration is promoting a plan which I believe should be embraced by the Republicans then I think Fannie and Freddie are essentially toast.
As you might expect the National Association of Realtors is having a killer case of irritable bowel syndrome over this discussion. A couple of days ago they issued their own press release in which they referred to themselves as the "leading advocate for home ownership" and claimed that only the government can provide backing for affordable mortgages. But then they go on to say that the taxpayers shouldn't have to shoulder the burden and this program should be self-financing and subject to prudent underwriting standards. Like private enterprise can't do that? Like only the government can deliver packages? Go figure.