Debate: Fannie Mae and Freddie Mac

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Should Fannie Mae and Freddie Mac exist, or be dismantled?

Background and context

NYTimes Room for Debate series on this topic: In 1938, Fannie Mae and Freddie Mac were created to package and secure mortgage lenders' loans. Congress commissioned these two entities to package loans in a way that guarantees the purchaser the principle and interest back in whole. Congress commissioned the two entities to provide liquidity and stability to the loans. The government sponsored agencies also purchased some of these loans and included them as part of their portfolios. [1] Nine out of ten American mortgage loans are provided by Fannie Mae and Freddie Mac's services. During the 2008 financial crisis, their $5.6 trillion portfolio began to fail. As a result, the government bought them out to soften the banking crisis. The US Treasury recently introduced its plans to do away with the two firms. The government's stated intentions for closing down the entities are to rebalance the ratio of home ownership to home renting. BY 2016-2018, the Treasury plans to enact new regulations that create a smooth transition from a government-based economy to a private sector. [2]

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Should Fannie Mae and Freddie Mac be dismantled?

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Pro

• No reason govt should be backing mortgage securities. In European countries where the government does not play any role in the mortgage industry, home ownership is higher. [3]

• Govt shouldn't perpetuate corrupt organizations. According to UC Berkeley's economist Jaffey, all of the tax-payers' bailout money had no payoffs/ benefits to the taxpayers. Where did the money go? The CEOs pocketed the bailout money. Furthermore, while some may argue that Fannie Mae is unique in its ability to back security loans to middle-income and low-income Americans, this is not the reality. Instead, the US's rates are no better than other governments that do not interfere with their mortgage industry. This shows that by letting go our hybrid government and private lending company, there will be no detractor. The money we invest toward Fannie Mae and Freddie Mac goes in the pockets of corrupt CEOs instead of toward "little" American. [4]

• Supporting FannieMae/FreddieMac perpetuates too big to fail banks. The guarantee that Fannie Mae and Freddie Mac was federally insured was false. However, by the government bail-out of the failure, the US government perpetrated the mentality that banks can issue irresponsible loans and not suffer the consequences. Barney Frank pointed out the fallacy of the government-backed guarantee: "There is no guarantee. There's no explicit guarantee. There's no implicit guarantee. There's no wink-and-nod guarantee. Invest and you're on your own. Nobody who invests in them should come looking to me for a nickel. Nor anyone else in the federal government." The only reason the government was inclined to support these two entities more than others was because of their INITIAL stable banking policies. Before the mid-2000s, they dealt with fixed, 30-year loans only AFTER documenting their employment, income, and a requirement of a down payment of ten to twenty percent.[5]

Supporting Fannie Mae and Freddie Mac supports a home ownership structured United States. If Americans cannot afford houses, they should not. Because of the bailouts, Americans own 79.9 percent of the companies. Instead, we should shift over to a renters' economy in order to avoid another subprime crisis.[6]

Too Big To Fail sets a bad precedent. If we continue funding large financial firms, they will continue to make risky investments. The bailout has merely extended this philosophy to 2/3 of the nation's financial system. Because of this safety net mentality, these banking institutions don't adequately prepare for risk. http://www.huffingtonpost.com/2011/04/07/federal-reserves-lacker-reforms_n_846033.html

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Con

There's too much debt tied up in Fannie Mae and Freddie Mac to dismantle the agencies. Half of our country's $11 trillion in debt is in these agencies. New institutions take too long to implement when we have such an extensive debt history with these two entities.[7]

Fannie Mae brings unique mortgage securities to the table. Unlike other corporate security backing agencies, Fannie Mae proudly issues a third to half of their loans to low-income and middle-income people. Fannie is special because they offer the American dream to low and middle income Americans. [8]

The cost of Fannie Mae and Freddie Mac are not nearly as much as most people think. The Treasury says the total cost of intervention will be less than $140 billion-- less than 1% of the $14 trillion debt. This is less than the economic crisis of the early 1980s and 1990s which cost 2.4% of the nation's economic output at the time. Furthermore, banks have payed back close to $245 billion that was loaned to them, and taxpayers are said to earn $20 billion profit from the dividends and interest. http://articles.latimes.com/2011/feb/28/business/la-fi-bailouts-20110228

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Pro/con sources

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Pro

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Con

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External links