I applaud recent government actions to restore confidence and stability in the housing industry by placing Fannie Mae and Freddie Mac into a conservatorship. Federal cash guarantees are part of the plan, which will also replace key executives at the two government sponsored enterprises (GSE's).
Many analysts believe that this move will lead to lower interest rates in the short term and help bring buyers back to the market to reduce the high inventory of homes. All this is good, but it may come at a price. Taxpayers may be stuck with a $200 billion bill to bail out the two GSE's. But there aren't many good options at this point in time.
The original objective for the two GSE's was to provide a "counter-cyclical balance" to the marketplace, letting private organizations operate freely in good times and providing alternative options in bad times, all to ensure consistently affordable homeownership.
These are respectable goals, but over the years, Fannie and Freddie have grown to control roughly half, or about $5 trillion of securitized mortgages in the United States. Part of the stated objectives of the new plan is to allow them to continue to grow through 2009, in an effort to stabilize the market, but then in 2010 to shrink by 10% each year to a more reasonable size.
However, creators of this new restructuring plan recognize that congress and the new administration will ultimately determine a permanent future for Fannie and Freddie. It is my hope that their original mission, to create opportunities for affordable housing, will not be lost, while at the same time, their dominance in the marketplace will be reduced.
Nobody likes the idea of having the government control such a large portion of the mortgage industry, but for the short term, this plan may play a key role in the resolution of the serious problems in the housing industry. A reorganization of Fannie and Freddie may be long overdue and have a positive impact, but we need to be sure that we don't facilitate government control of an industry vital to the economic well being of so many in our country.
