DMI Blog

Mark Winston Griffith

Hey, Freddie and Fannie: What about consumers?

Economic news lately has focused on the failing financial health of Fannie Mae and Freddie Mac, the country's largest purchasers of home mortgages. Wall Street is on edge, fearing that other financial institutions will also experience severe drops in stock market value and that the entire American financial system is in jeopardy. Mortgage loan volume is down and the housing market, already bad, could get a helluva lot worse.

With all this the-sky-is-falling, macro-economic anxiety, one obvious, but seldom heard concern these days is, what about consumers? How will working class families fare in trying to enter the middle class through home ownership? As Grethen Morgenson of the New York Times recently commented, the "ownership society" wasn't supposed to go down like this.

Despite what the mortgage bankers lobby says, the more government regulation can slow down and tame subprime lending, the better. What the leadership in the Federal Reserve, Treasury, Congress and White House need to do is press the reset button and re-consider what real "democratization of credit" could look like.

Let's declare the ownership society officially dead, or at least still-born, and re-think what it means to get credit into the hands of people of color, low- and moderate-income people and people with poor credit histories in a responsible way. Let's measure success not by the number of people who receive mortgages, but how many people are able to remain in their homes and achieve economic security.

In the meantime, the federal government is stepping in to guarantee Freddie and Fannie loans and provide them with a line of credit. This is a critical development for working families because the solvency of Fannie Mae and Freddie Mac factors prominently in the ability of potential homebuyers to safely and soundly get in on the homeownership game.

What's tricky about coming to the aid of Freddie and Fannie is that as government-sponsored enterprises (GSEs) they receive special forms of treatment and support from the federal government, as well as tax breaks, in return for their serving the public good. But at the end of the day, Freddie and Fannie are private companies. As Paul Krugman recently noted,

The most important of these privileges is implicit: it's the belief of the investors that if Fannie and Freddie are threatened with failure, the federal government will come to their rescue. This implicit guarantee means tat profits are privatized but losses ar socialized. If Fannie and Freddie do well, their stockholders reap the benefits, but if things go badly, Washington picks up the tab. Heads they win, tails we lose.

The other inconvenient truth is that Freddie and Fannie, urged on by HUD, invested heavily in the subprime lending industry, beginning in 1995 under the Clinton Administration. Literally buying into the now discredited notion that subprime loans were helping low-income neighborhoods and communities of color, Fannie and Freddie purchased billions of dollars of subprime mortgage backed securities, thus fueling the subprime lending frenzy.

This is the essence of the devil's bargain that the American pubic has made with Freddie and Fannie. For all the moral hazards of the goverment coming to the rescue of financial instititutions that have subprime blood on their hands, the fact remains that without a viable secondary mortgage market, access to affordable, non abusive mortgage credit will be limited at best. If Freddie and Fannie can somehow be converted into well regulated institutions that reinforce high underwriting standards, they will be needed more than ever before.

Mark Winston Griffith: Author Bio | Other Posts
Posted at 10:24 AM, Jul 16, 2008 in Economic Opportunity
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