In other words, the sinkhole that is Fannie and Freddie — Freddie just said it needed an additional $1.8 billion and the Congressional Budget Office says the combined companies could cost taxpayers $389 billion over the next decade — is not a function of those firms making new loans that have gone bad, but the continued “bleeding,” as Mr. Frank put it, from previous loans made before the crisis that are still going belly-up.
More important, shutting down Fannie and Freddie and having the private market step in, as politically popular a sound-bite as that may be, is economically unfeasible. For better or worse, Fannie, Freddie and Ginnie Mae were behind 98 percent of all mortgages in this country so far this year, according to the Mortgage Service News. Pulling the rug out from under them would be pulling the rug from under the entire housing market as it continues to struggle.
“Nobody in the private market thinks we’re ready,” he said, adding that whatever legislation is developed, it will be “for a postrecession world.”
That reality, however, is not changing the minds of many who are calling for a return to a private system that doesn’t depend on the government to subsidize housing.
One of the more interesting ideas being floated is that the government-sponsored enterprises, Fannie and Freddie, would subsidize loans only for low-income families by lowering the size of a so-called conforming loan. At the moment, Fannie and Freddie are buying up single-family mortgages for up to $417,000, and in some high-cost areas as much as $729,750, clearly benefiting families that don’t need the subsidy. Even if the size of a conforming loan were reduced — a prospect that troubles Mr. Frank — there will still need to be some sort of support for that marketplace because the big banks say they won’t service it.
“A clear government role will be necessary to support lending to lower-income borrowers because it is likely that underwriting standards will become more rigorous and funding for mortgage lending more difficult and costly,” the deputy general counsel of Bank of America, Gregory A. Baer, wrote in a letter to the Treasury. (Critics of the banks will point to language like that to show why the bailouts are not helping ordinary Americans.)
No matter what the ultimate plan, the transition to get there will be painful.
“Were the G.S.E.’s to cease buying mortgages or guaranteeing mortgage-backed securities, financing for buying homes today would be virtually nonexistent until the banks got back up on their feet. This would result in mortgage prices increasing, causing demand for housing to decrease, taking the value of homes even further down,” Anthony Randazzo, director of economic research of the Reason Foundation, wrote in a letter to Mr. Geithner.
Nonetheless, Mr. Randazzo, whose foundation leans toward libertarian views, takes a much bolder step. “This means that prices have not been allowed to reach their natural bottom, from which a sustainable recovery could begin.” And Mr. Randazzo wants to see housing prices truly bottom out.
But allowing the housing market to collapse simply so it can rise again — a very free-market approach — is politically unpalatable, especially as the nation’s unemployment number still hovers near 10 percent.
“It’s intellectually pretty difficult,” Mr. Frank said.