Do We Want The Government Standing Behind Fannie And Freddie Forever?

Is this a good idea?

From Reuters:

The U.S. Mortgage Bankers Association said on Wednesday it will ask Congress to transform mortgage lenders Fannie Mae, Freddie Mac into several smaller, privately held companies that would issue mortgage securities with a government guarantee.

The proposed framework from the industry group would give successor entities to Fannie MaeĀ and Freddie Mac the authority to create securities backed by certain types of mortgage.

The new companies would guarantee the securities against defaults on underlying mortgages and pay fees into a federal insurance fund that would make good on interest and principal payments to bondholders if the companies were unable to make them.

“The government has an important, limited role to play to ensure a stable flow of funds for mortgages.” said Michael Berman, MBA’s vice chairman and chairman of the Council on Ensuring Mortgage Liquidity.

The MBA plan calls for government agencies, rather than the new companies, to assume the “mission” of promoting affordable housing that Congress has long assigned to Fannie and Freddie.

It makes me uncomfortable but perhaps I’m over reacting. Certainly it places the federal government in the position of subsidizing housing for the foreseeable future. That doesn’t sound like a particularly good idea — once again picking winners and losers – but at the same time shelter is a pretty basic need and it’s hard to argue against government assistance for that sector.

The problem is that you can start making all sorts of arguments for other basic goods, food and transportation for example, and then you end up, well you know where.

Someone in Washington needs to come up with a long-term plan for the mortgage market. Currently the market is nothing more than an extension of the Fed and Treasury. Absent any plan this risks becoming the status quo. The longer we wait, the harder it’s going to be to institute any real reforms.

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