Editorials

EDITORIAL | Fannie Mae, Freddie Mac become more necessary than evil

Two cheers for Fannie Mae and Freddie Mac. OK, maybe it's just one-and-a-half cheers.

In any case, there has been enough good news lately about Fannie and Freddie to add them to the list of government projects and interventions that don't deserve a rousing ovation but whose otherwise lackluster performance is preferable to the outcome if they had been allowed to tank during the financial crisis.

Of course, Fannie Mae and Freddie Mac contributed to the financial crisis. Like the other suckers and hucksters -- financial institutions often were both -- they dealt in mortgage-backed securities that inflated the housing bubble and then exploded it.

As "government sponsored enterprises," they technically were not official arms of the federal government. In fact, they got into such trouble in part because their stockholders and high-ranking employees wanted them to act more like private financial institutions and reap a cut of the profits that private lenders were making by selling fat mortgages to buyers who defaulted when reality hit.

Fannie and Freddie owned or guaranteed more than half of all the mortgages in America. Their policy role was to increase the pool of money available for mortgages. Like their completely private cousins, though, Fannie and Freddie were influenced by greed to set disastrously low lending standards. When they neared collapse, with potentially disastrous results for the economy, the Bush administration put them into "conservatorship" in September 2008. This was another case of privatizing the profits but socializing the losses.

And the losses were huge. Taxpayers have pumped about $190 billion into FM1/4FM. They aren't healthy yet. But without Fannie and Freddie, consumers would have had an even tougher time getting home loans in the past four years. The real estate market would have been even more limp, the recovery even more sluggish.

Fannie and Freddie even have started having profitable quarters and paying taxpayers back. In the second quarter, The New York Times reports, Fannie Mae had net income of $5.1 billion and Freddie Mac $3 billion. That indicates underlying improvement in the real estate market, which is of particular interest in Florida.

The Treasury Department also just announced a plan to rationalize the way Fannie and Freddie pay back taxpayers. To this point, they have returned nearly $50 billion in dividends. But, in a case of bureaucratic foolishness, they have been borrowing money from the Treasury to pay mandated dividend payments...back into the Treasury. Under new rules, Fannie and Freddie simply will return all profits to the Treasury.

The consensus in Washington is that Fannie and Freddie need to shrink or go away. The new Treasury rules require Fannie and Freddie to shed their loan portfolios more quickly. Still, Washington needs to be cautious. Private lenders are nowhere near ready to provide the liquidity and security that the housing recovery still needs. In fact, the need for Fannie and Freddie might never be zero. They're no longer part of the problem. They should survive as long as they are part of the solution.

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