While Foreclosures Persist the Big Question Before the Government is Allowing Fannie and Freddie to Also Persist

While foreclosures persist the big question before the government is allowing Fannie Mae and Freddie Mac to also persist. The mega mortgage market comprising of loans too big for the eligibility of Fannie and Freddie have run efficiently for a long time with the rates being slightly higher than the small mortgages. Other asset markets like auto loans (securitized) have done well without government intermediaries.

If the siblings are all permitted to operate as before with the government shouldering all the risks they would take, then the two would eat up a large slice of the mortgage market. But this arrangement has cost the taxpayers dearly. There is proof that the private market can start, securitize and efficiently distribute residential house mortgages independently. Although the private market was largely responsible for bringing about the foreclosure related financial mayhem by generating innumerable sub-prime mortgages, the parade was not blocked by Fannie and Freddie; they joined in the bandwagon and it may be said that in some way also gave the lead.

On pen and paper it should not be impossible for the government financial entities to be self-sustaining. But many years of observations have shown that there is no way the government can be stopped from introducing undercover subsidies and mandates catering to special interests to make easy the operations of these agencies. If more subsidies by the government in the housing sector are in the offing it should be transparent and legislated accordingly.

Some have suggested that the two should be replaced by one agency but that is not without danger. Its guarantees would subsidize the risks from the mortgages and ultimately the loser would be the taxpayer.

The best way to prevent this is to ease out Fannie Mae and Freddie Mac in phases. If the finance market dealing with residential house mortgages becomes totally private then it would shoulder the losses resulting from its own errors as regards prices and insurance coverage. The role of the government should be overseeing through regulations and not by directly getting into thick of the operations of the financial companies.

Immediately Fannie and Freddie cannot be shut down because they are too big. The transition plan would block them from purchasing new mortgages. Meanwhile their portfolios would decrease with the paying off of the mortgages they own. Within a decade their portfolios would fade to insignificance.