Yesterday, Joe Nocera penned an extraordinary column expressing his bafflement at the Trump administration's drive to release Fannie Mae and Freddie Mac, two firms that purchase and guarantee around half of single-family mortgages in the United States, from government conservatorship. Nocera argues against such a move, writing that "if it ain't broke, don't fix it . . . Fannie Mae and Freddie Mac ain't broke."
The piece is disconcerting from start to finish. Nocera writes that Fannie and Freddie make the 30-year fixed-rate mortgage, a product common only in the U.S., possible and thereby "help more people attain the American dream of homeownership." Nocera neglects to mention that the U.S. homeownership rate, at 64 percent, is the same as it was in the late 1960s, long before mortgage securitization. This rate is lower than those of other Western countries (Table 1) and particularly low for minority Americans.
Table 1. Homeownership Rate, Selected Countries
Source: Eurostat; Statistics Canada; Statistics Japan; U.S. Census Bureau. 2013 data for Japan, 2016 data for Canada, 2019 data for all other countries.
Nocera is correct that the 30-year fixed-rate mortgage probably wouldn't exist without Fannie and Freddie, which are only (barely) going concerns today thanks to U.S. taxpayers. But countries without this product seem to do a better rather than worse job of promoting homeownership.
Nocera also repeats the dubious assertion that the U.S. government earned a "healthy return" on its bailout of Fannie and Freddie. Yes, since it funneled around $190 billion into the two firms in 2008, the government has collected around $300 billion in dividend payments. But those dividends are contingent on an essentially unlimited government backstop. Furthermore, Fannie and Freddie have had virtually no capital since 2008 and continue to operate merely because the government stands behind them. In short, were Fannie and Freddie private concerns, they would have been forced into receivership long ago.
The bailout of Fannie and Freddie was not a good investment. The Congressional Budget Office, in fact, estimated a return adjusted for the enormous risk Uncle Sam took on when it rescued the two firms of minus $311 billion. Other, more recent, academic evaluations also show a negative return.
Fannie and Freddie owe their continued existence to a gigantic and ongoing taxpayer subsidy. There are beneficiaries, of course, including large asset managers who deal in the mortgage-backed securities Fannie and Freddie issue. As of 2019, there are close to $10 trillion such securities outstanding, with $1.3 trillion issued in 2018 alone. Asset managers therefore have a large economic stake in our subsidized mortgage market. But claiming that this sweet deal benefits all Americans, as Nocera does, is of no service to the public interest.
"Any objective observer," says Nocera, "would have to concede that Fannie and Freddie have done a very good job since the 2008 crisis." Yet an examination of the evidence suggests otherwise. Conservatorship was designed to be a temporary (read: 6-month) arrangement, not an 11-year-long commitment with no end in sight. During this time, Fannie and Freddie's role in the mortgage market has actually increased, and they've expanded their purchases of high-risk mortgages as the credit cycle matures. These facts supply ample grounds for concern.
Finally, concerning what caused Fannie and Freddie to go belly-up in 2008, Nocera writes:
What got Fannie and Freddie in trouble was not the government mandate, but their public company impulses. In the years before the crisis hit, they abandoned their historically sound underwriting standards because they were losing market share to the mortgage originators that were writing all those subprime loans that came a cropper when the bubble burst. As government wards, Fannie and Freddie no longer have any incentive to act foolishly.
Famous last words, as they say. In any event, and while there's a debate around the relative role of government intervention and speculative frenzy in the last years of the housing boom (2004-2006), Fannie and Freddie's ill-fated lowering of underwriting standards began much earlier, in the late 1990s. The government played a key role in fomenting this decline of credit standards by steadily ratcheting up the share of high-risk mortgages that Fannie and Freddie must purchase. Fearing that failure to comply would prompt Congress to allow competitors to challenge their duopoly, Fannie and Freddie obliged, with terrible consequences for vulnerable homeowners, and the U.S. economy as a whole.
Housing finance in America is a tangled web of cross-subsidies, public guarantees, government mandates, and competitive restrictions. Those features make it exceptional around the world, but not in a good way. Those who believe Fannie and Freddie are the best invention since sliced bread might ask themselves why, after so many decades, no other country has been inclined to look to the United States for inspiration about how to run its mortgage market.
Diego Zuluaga is a policy analyst at the Cato Institute's Center for Monetary and Financial Alternatives.