Privatize the Loss! Changes May Be Coming to Fannie Mae and Freddie Mac

Aug. 6, 2013
There is a bipartisan Senate proposal to close the doors at Fannie Mae and Freddie Mac, a move that will shift the burden of mortgage failure risk to investors instead of the taxpayers.

The president is about to jump on board a bipartisan Senate proposal that would shut down mortgage giants Fannie Mae and Freddie Mac over a period of many years.  Private investors would buy securitized mortgages, and thus the private sector would be the first to bear the loss if another round of massive mortgage failures should appear.

It is a great idea on the surface, and I am all for it.  The taxpayer should not be backstopping the housing industry.  Unfortunately the federal government would be the reinsurer of mortgage securities as a backstop to private capital. 

The government would institute fees to help fund the purchase of homes by lower-income applicants and ensure the availability of low-income home rentals.  These fees and other ongoing government involvement will add costs to the purchase of a home, but that is probably unavoidable at this juncture.

The elimination of Fannie and Freddie should allow the market to have a greater hand in determining mortgage rates, although the Senate plan provides for the government to keep involved in rate setting to some extent.  The proposal probably means we can expect higher mortgage rates in the years to come, a rise based to some extent on market forces. 

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