Farewell, Fannie & Freddie

Fannie and Freddie likely contributed more to the 2008 financial mess than any other government entities. Now, it's time to get them off the taxpayers' backs.

Republicans, not without reason, want to get Fannie and Freddie off of taxpayers’ backs as soon as possible. They’re right. Fannie and Freddie likely contributed more to the financial mess of 2008 than any other government entity. Transferring their businesses partly or almost entirely to the private sector would reduce the chances of another financial crisis and, if done correctly, might even produce a taxpayer gain.

Members of Congress like Jeb Hensarling (R-TX) and Scott Garrett (R-New Jersey) are doing all of the right things in proposing the ends of Fannie and Freddie. But it’s foolish to pretend that getting rid of Fannie and Freddie will not have costs. Without Fannie and Freddie or, similar oligopolistic competitors that (one way or another) have an implicit government guarantee on their operations, it’s unlikely that most Americans would be able to find attractive 30-year, fixed rate, self-amortizing mortgages with modest down-payments.

Fannie and Freddie, largely by virtue of their implicit guarantee, could assume an enormous amount of interest rate risk much better than truly private firms could. The main product they facilitated is obviously an attractive one that most American home buyers wanted. It’s also one that’s quite rare or entirely unknown in countries that don’t have entities like Fannie and Freddie. And, for all of the teeth gashing it may produce among liberals (Maxine Waters raised it as a major point against privatizing Fannie and Freddie) getting rid of 30 year mortgages is an acceptable tradeoff.

A look around the world shows that the sky does not fall in places without 30-year mortgages. In the UK (where, admittedly, a hugely arcane land tenure system changes just about everything), most people have mortgages whose interest rate changes every year. In Canada, a typical mortgage adjusts every ten years, while down payment requirements tend to be much higher. In Spain, which, it appears, has the highest homeownership in the developed world, many mortgages have 99-year terms and frequently adjust. Thus, they almost never get paid off in full.

Thirty-year mortgages are surely an attractive product that makes a lot of sense for consumers. But their absence doesn’t necessarily erect a barrier to homeownership. Indeed, some countries without them, including the UK, actually have higher homeownership rates than the United States. Democrats are probably right to predict that 30 year fixed-rate mortgages will be hard to get or, at least, unattractive in a world without Fannie and Freddie.  But avoiding another major crisis is far preferable to keeping a nice-to-have financial product.

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