Fannie, Freddie Fix Won't Stop Next Housing Crisis

The news about Fannie and Freddie's losses will add more urgency to the push for reform. Obama's current plan however may only delay the next housing crisis.

Freddie Mac and Fannie Mae’s smaller but still enormous recently reported losses aren’t a surprise. The very structure of the two massive government-supported enterprise mortgage securitizers means that they’re overwhelmingly likely to lose money so long as a large percentage of American houses remain “underwater.”  This makes reform all the more urgent. This, I think, is both good and bad. Here’s why:

The Good: As long as these losses continue, there will be more pressure for Democrats and Republicans to work together to do something that takes Fannie and Freddie off of the taxpayers backs. Unlike other issues—where the parties have little common ground—the outlines of consensus on Fannie and Freddie seem to be emerging. The relatively warm reception for the Obama administration’s own plan for phasing out Fannie and Freddie, furthermore, shows that a consensus plan might well pass Congress with overwhelming bipartisan support.

The Bad: Americans really love thirty-year fixed rate, self-amortizing mortgages with modest down payments and any plan that passes Congress will somehow assure that they continue to exist. This, in turn, will almost certainly lead to another mortgage bailout at some point in the future.  Such mortgages, which don’t really exist outside of the United States, involve asking the private institutions to take on more risk than is wise. This, in turn, means they’ll only continue to exist if the government somehow guarantees them.  And, one way or another, the government will. This means that another housing crisis is likely in the next few decades.

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