Can Fannie And Freddie Ever Break Free?

The NY Times has an excellent article tonight about the passing of Fannie and Freddie into what increasingly appears to be permanent government ownership.

The article points out two essential facts. One that so much money has been passed from the government to the two that they could never possibly pay it back and two that the attraction of controlling what amounts to the mortgage finance industry and thence the housing industry is too big a temptation for politicians to pass on.

Here is the analysis and a comment from our old friend Barney Frank. His comment perfectly illustrates the thinking in Washington.

Most important, by taking over the companies, lawmakers have gained a lever over the housing market and national economy that many — particularly Democrats — are loath to discard, legislators say.

“Once government gets a new tool, it’s virtually impossible to take it away,” said Representative Scott Garrett, a Republican of New Jersey and member of the Financial Services banking subcommittee. “And Fannie and Freddie are now tools of the government.”

One reason that Fannie and Freddie will never return to their earlier forms is simple mathematics: to become independent, Fannie Mae and Freddie Mac must repay the taxpayer dollars invested in the companies, plus interest. Even if the firms achieve profitability, it could take them as long as 100 years — or longer — to pay back the government. And almost no one expects the companies to return to profitability anytime soon.

Moreover, the takeover has provided legislators with a long-sought ability to influence the mortgage marketplace directly and pursue social goals like low-income housing.

“There is a commitment to restructure these companies, and we are going to want to retain a hand in the things that matter, like affordable housing and making sure that the housing economy doesn’t become a threat to the entire economy again,” said Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee. “Some of what these companies did will be returned to the private sector, and some of it is going to remain with a public entity.”

Make of that what you will.

Before I bury this bone, let me point you to one other good observation that the author made.

The possibility that these companies — which together touch over half of all mortgages in the United States — could remain under tight government control is shaping the broader debate over the future of the financial industry. The worry is that if the government cannot or will not extricate itself from Fannie and Freddie, it will face similar problems should it eventually nationalize some large banks.

The lesson, many fear, is that a takeover so hobbles a company’s finances and decision making that independence may be nearly impossible.

A couple of days ago I put up a post that talked about the creeping (creeping might be too mild a word) socialization of a big piece of our financial services industry. We seem to be going down this road without the benefit of the serious debate it warrants. That may well be the biggest mistake in this whole ugly mess.

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