Fannie Mae and Freddie Mac Must be Dissolved

Mel Watts, the recently confirmed director of the Federal Housing Finance Administration, last week announced new policies for Fannie Mae and Freddie Mac. He wants to continue to allow these government backed financiers to back mortgages even as large as $625,500 and to “encourage credit access.”  This policy reverses the efforts by his predecessor at the FHFA to shrink the footprint of Freddie Mac and Fannie Mae by tightening credit standards and reducing the amount of mortgages they could guarantee.

As I have noted before, the Clinton Administration set the stage for the mortgage crisis by encouraging government backed mortgages with lax standards into order to engage in redistribution at the potential and, as it turned out, actual expense to taxpayers. Watts is going down the same road. Sadly, any administration is likely to succumb to the temptation so long as Fannie Mae and Freddie Mac are in existence.

Watts’ polices reflect four dangers of government involvement in the mortgage market. The first is that of redistribution. Creating an entity that can redistribute without raising taxes and even without direct borrowing by the treasury reduces the political costs of redistribution.

The second is the danger of politically motivated energizing of the housing market. Any administration would like to encourage home building and thus increase short-term economic growth even at the expense of long-term fiscal and economic risks. The political payoff is increased vote shares at the next election. The Obama administration, facing electoral losses in 2014, is particularly desperate to do so. It is hardly an accident that the new policies of a political appointee reverse those of a civil servant: as a former Congressman, Watts is more attuned to the political advantages for his party.

The third danger is that of providing government support for those who need no support. These new policies remind us again that because of the power of interest groups, like builders and realtors, government redistribution in housing is almost never targeted at the truly needy. Mortgages over $600,000 go the prosperous or at least those who can pretend to be.

The final danger is to employment. Watts’ policies conflict with efforts to increase employment. People who own their homes are less likely to move to look for work when they lose their jobs. Government policies to increase home ownership, which include not only government backed mortgages but the mortgage deduction, make for a less flexible labor market than would be the case where subsidies did not distort the choice between owning and renting.

When Carthage represented a continuing threat to Rome, Cato the Elder famously ended every speech with the words: “Carthago delenda est.” Carthage must be destroyed. Would that a Senator today end every speech with a similar cry: “Fannie Made and Freddie Mac must be dissolved.”

John O. McGinnis

John O. McGinnis is the George C. Dix Professor in Constitutional Law at Northwestern University. His book Accelerating Democracy was published by Princeton University Press in 2012. McGinnis is also the coauthor with Mike Rappaport of Originalism and the Good Constitution published by Harvard University Press in 2013 . He is a graduate of Harvard College, Balliol College, Oxford, and Harvard Law School. He has published in leading law reviews, including the Harvard, Chicago, and Stanford Law Reviews and the Yale Law Journal, and in journals of opinion, including National Affairs and National Review.

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  1. gabe says

    “As I have noted before, the Clinton Administration set the stage for the mortgage crisis by encouraging government backed mortgages with lax standards into order to engage in redistribution at the potential…”

    Billy Bob did quite a bit more than “encourage” shoddy lending practices. Every time a bank was up for a quarterly review or sought a merger, it was subjected to new “fair lending demands” or fined millions.

    And after reading today’s news about the Clinton foundations “cock-up” in Haiti, I wonder if they used the same techniques there.

  2. johnt says

    Only government repeats and expands failure. Fannie and Freddie distributed $trillions the first time around, then passed it’s paper onto the banks, which naturally were faulted for weakened balance sheets. To the left noting succeeds like repeated, huge failure.
    But it does buy votes. A great racket.

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