And So I Go: Yesterday, Today and Tomorrow

Congressional Budget Office on Fannie, Freddie and Mortgage Finance Options

Posted on: December 23, 2010

CBO on Fannie, Freddie and Mortgage Finance Options | Cato @ Liberty.

One of the many messes the unhousebroken Obama Administration and Democratic Congress has made for  We the People to clean up is the full federal ownership of the two giant mortgage companies Fannie Mae and Freddy Mac.  These companies under the influence of Rep. Barney Frank and Senator Chris Dodd have gobbled up every toxic mortgage  mortgage bankers made in order to make the initial profit and knowing they could then sell them to Fannie or Freddie.    It is probably the biggest mess this last democratic congress has made that we really can not just simply  de-fund and therefore destroy as may be the case with Obamacare and some other stupidities.  So what will the next Republican controlled House Congress do with the mess?  This is the advise of the non-partisan Congressional Budget Office which has consistently;y advised against the government control of these once privately held  companies.

CBO on Fannie, Freddie and Mortgage Finance Options

Posted by Mark A. Calabria

Just in time for the holidays,CBO  ( Congressional Budget Office) has released its analysis of the costs and benefits of various alternatives to our current system of mortgage finance, particularly the role of Fannie Mae and Freddie Mac.

The report examines three possibilities:

  1. A hybrid public/private model in which the government provides explicit guarantees on privately issued mortgages or MBSs;
  2. A fully public model in which a wholly federal entity would guarantee qualifying mortgages or MBSs; or
  3. A fully private model in which there would be no special federal backing for the secondary mortgage market.

The report doesn’t really push one option over another, but simply lays out the advantages and disadvantages of each.  Some highlights worth keeping in mind as the debate continues into the new year:

“Relying on explicit government guarantees…would also have some disadvantages…If competition remained muted, with only a few…firms participating in the secondary market, limiting risk to the overall financial system and avoiding regulatory capture could be difficult…federal guarantees would reduce creditors’ incentive to monitor risk. Experience with other federal insurance and credit programs suggests that the government would have trouble setting risk-sensitive prices and would most likely end up imposing some cost and risk on taxpayers. In addition, a hybrid approach might not eliminate the frictions that arise between private and public missions.”

“Privatization might provide the strongest incentive for prudent behavior on the part of financial intermediaries by removing the moral hazard that federal guarantees create.  By increasing competition in the secondary market, the privatization approach would reduce the market’s reliance on the viability of any one firm. Private markets may also be best positioned to allocate the credit risk and interest rate risk of mortgages efficiently, and they would probably be more innovative than a secondary market dominated by a fully federal agency. Further, privatization would eliminate the tension between public and private purposes inherent in the traditional GSE model.”

It is worth remembering that over the years, the CBO has actually been quite strong in warning against the dangers of the GSE model.** Sadly Congress simply chose to ignore those warnings.  Here’s hoping that the CBO has little more influence on this issue than they’ve had in the past.

**The government-sponsored enterprises (GSEs) are a group of financial services corporations created by the United States Congress. Their function is to enhance the flow of credit to targeted sectors of the economy and to make those segments of the capital market more efficient and transparent. The desired effect of the GSEs is to enhance the availability and reduce the cost of credit to the targeted borrowing sectors: agriculture, home finance and education. Congress created the first GSE in 1916 with the creation of the Farm Credit System; it initiated GSEs in the home finance segment of the economy with the creation of the Federal Home Loan Banks in 1932; and it targeted education when it chartered Sallie Mae in 1972 (although Congress allowed Sallie Mae to relinquish its government sponsorship and become a fully private institution via legislation in 1995). The residential mortgage borrowing segment is by far the largest of the borrowing segments in which the GSEs operate. GSEs hold or pool approximately $5 trillion worth of mortgages

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