Fannie Mae, Freddie Mac
By Arnold Kling
Well, homeownership isn’t a big problem, and Fannie and Freddie have been minor — not major — forces in past increases. The others include rising incomes, falling interest rates, low-down-payment mortgages (as little as 3 percent) from the Federal Housing Administration, the tax deductibility of mortgage interest payments and government programs to help first-time buyers. But Congress clings to old mythology. Heeding yesterday’s problem, it may cause tomorrow’s.
I worked for almost a decade at Freddie Mac. It would take the financial equivalent of a tsunami to destroy Freddie or Fannie. However, the taxpayer cost could be over one hundred times what we have committed to spend on relief efforts in Asia.
The public’s risk-reward ratio in supporting Freddie and Fannie, which was never particularly favorable, gets worse every year. However, as Samuelson points out, it seems unlikely that Congress would fully privatize those companies.
For Discussion. Who would pay the political price if there had to be a bailout of Freddie or Fannie?