You know, I'm not terribly upset at the idea of winding down Fannie Mae and Freddie Mac. That's a reasonable proposition if, once every couple decades they're going to cost taxpayers a sudden $135 billion. They did help provide home buyers of the past 30 years with slightly lower rates and made it way easier for them to get fixed-rate mortgages (and thus, stability in cost). So there was definitely a benefit, but at this point we've become acutely aware of the costs. We're probably over-emphasizing them, since they're fresh in our minds, but that's alright, we weren't too aware of them ahead of time. In short, winding down these entities isn't really a bad thing, and doesn't scare me too much.
But what does scare me is the idea that I sense floating around that somehow getting rid of Fannie and Freddie is going to prevent this kind of economic disaster in the future. Or that Fannie and Freddie were singlehandedly responsible for this particular disaster. Or that the private market will get it right without any checks.
See, Fannie and Freddie weren't the only ones backing subprime mortgages and bad debts. They weren't even the first ones doing it. Heck, after you figure in the bailouts, they weren't even the only ones who had their bad loans guaranteed by the taxpayers! Much of what went wrong in the housing market happened in the unregulated private market, and much of what went wrong with Fannie and Freddie went wrong because of the lack of regulatory guidance on mortgage terms.
It wasn't just making loans to people who couldn't pay them that caused the financial meltdown. A lot of happened because these companies created loan products that were designed to not-be-paid-back. And a lot happened because there were rewards for total transactions, regardless of quality, because of the brokerage situation. And a lot happened because there were rewards for misleading borrowers into loans with higher rates than the borrowers actually qualified for.
These things all happened in the private market, and will continue to happen unless we have some rules protecting borrowers from unconscionable loan terms. Because mortgages are such complex documents, just putting borrowers on notice of the terms isn't sufficient to protect them; borrowers aren't sophisticated enough to know that a "yield spread premium" means "kickback to your broker for conning you into taking a higher interest rate than you should have." That means we should probably have some laws that make certain types of abusive mortgages illegal. We should also have law that make sure the language used in mortgages is clear and readable. We should probably have some laws that regulate brokers to make sure they aren't playing the people they're supposed to be helping. And we should make sure these laws have some teeth.
And we should probably know full well that these laws are going to cost homeowners a little bit more money in their respective rates. But we should also know that if we're going to leave it all up to the private market, well, that's not cheap either.
Mary Anne, do you remember
The tree by the river
When we were 17?