First off, it was a bad idea to privatize the two GSA’s Fannie Mae and Freddie Mac. The reason that these two GSA’s exist at all, is because of private industries inability to maintain a level, stable platform to of financing options in support of the housing industry. 1981 saw the culmination of policy errors come to a head as interest rates soared to over 18% for 30 year fixed rate mortgages for single family, owner occupied properties. The Fed, under Paul Volcker, was at the time under pressure to reign in inflation that had exceeded 13.5% in the previous year and threatened to become worse.
While pushing rate up to stem inflation, which was accomplished as inflation was trimmed to a little over 6% in 82 and then to the lower 3% in 83, the populous, including Congress recognized a vulnerability to the housing market, both new construction and existing. Without a stable source of funding, the housing market could very quickly deteriorate causing rounds of stagflation and damage to the GDP.
Fortunately, the US housing market had Fannie Mae, established in 1938, and Freddie Mac, established in 1970, as obvious stabilizers. Government entities that were financially strong enough to purchase mortgages from local banks and sophisticated enough to package them into securities that had a market in sovereign wealth funds, insurance companies and pension funds. The stability of the issues was the result of stringent, but fair to borrowers and investors, underwriting standards that moved the housing markets along at a near predictable pattern. That was until the mid 90′s when values of property values began to soar past any reasonable expectation. Sadly, the Fed saw fit to let the market run itself out, the US economy along with it.
To wind down or re-privatize Fannie Mae or Freddie Mac would be a tragic mistake. It would indicate that the government has forgotten why those two entities existed in the first place, while ignoring the lessons of recent past. While not opposed to privatization of certain functions over seen as certain GSE’s, Fannie Mae and Freddie Mac should not be among them as it too valuable an asset of the US citizens. – Ed
In a sign of how the rebounding housing market has sharply reversed Fannie’s fortunes, the company said it could report an even larger gain when it reports first-quarter earnings next month if it determines that the company is profitable enough to reverse certain write-downs of tax benefits that could be worth more than $58 billion.
The record windfall and possibility of similarly heady profits could have important political ramifications. Fannie Mae and its smaller sibling, Freddie Mac, which earlier this year reported its own record profit of $11 billion profit for 2012, now