We’ve Nationalized the Home Mortgage Market. Now What? – ProPublica
Fannie Mae and Freddie Mac, the taxpayer-controlled housing giants, guaranteed 69 percent of new mortgages in the first nine months of the year, up from about 27 percent share in 2006, according to Inside Mortgage Finance. Meanwhile, the Federal Housing Authority and the Department of Veteran’s Affairs currently back another 21 percent of mortgages, up from just 2.8 percent in 2006. Altogether, 9 of every 10 new mortgages are backed by the U.S. taxpayer, up from three in 10 in 2006, when the government share hit a decade-low, according to the publication.
“It is creeping nationalization,” says Jim Millstein, an investment banker who worked in the Obama administration’s Treasury Department as the Chief Restructuring Officer.
The problem isn’t just that the market is nationalized. It was nationalized in a slapdash fashion so that now it is riven by conflicts of interest and competing goals.
The possible solutions are well known and have been for years. But during its first term, the Obama White House made a tactical decision — politically astute but tinged with calculation, some say — not to push for change. Now with the election over, a bipartisan centrist consensus is forming to head down a path that offers the least resistance but could be the most dangerous: returning to what existed before the housing market imploded.
After taxpayers pumped $187.5 billion into them starting in 2008, Fannie and Freddie exist today in a limbo state, under government “conservatorship.” They aren’t fully private, profit-seeking entities, but neither are they explicit arms of government policy. They act both as profit-seeking businesses and as public agencies.
Freddie and Fannie’s main business is insuring mortgages, and they back $5 trillion or about half of the American mortgage market. They buy mortgage loans and bundle them to create mortgage-backed securities, earning fees. If a borrower stops making mortgage payments, Fannie and Freddie step in to continue the flow of payments to the mortgage-backed securities investors. The two companies also invest in mortgage-backed securities.