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ladybugca |
09/28/07 |
Without doubt, the housing market is getting hammered. Existing-home sales plummeted last month. Prices are falling; foreclosures are rising. And it's hard to get a loan — particularly a "jumbo" loan of more than $417,000, or a subprime loan of any amount.
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To help soften the blow, Congress is looking at options to get the government more involved, including a sensible plan to revitalize the Federal Housing Administration.
But one bad idea being considered is expanding the roles of Fannie Mae and Freddie Mac, the publicly traded corporations created by government to promote homeownership. A Senate proposal would lift by at least 10% the maximum amount of home loans they can own — currently $735 billion each.
These limits, which were recently increased slightly by federal regulators, initially were agreed to last year after accounting problems were exposed at both companies. Supporters of lifting the limits say it would pump more money into the mortgage market, encouraging lenders to lend.
Allowing Fannie and Freddie to expand their core business would certainly help their bottom lines and please shareholders. But it would do little, if anything, to fix home lending woes. Here's why:
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* It would add risk. As the recent turmoil has shown, financial services companies can have a hard time gauging risk. It's already disturbing that 40% of the nation's mortgage debt is owned or guaranteed by these two companies, which have a special relationship with government that includes a standing line of credit and an exemption from state and local taxes. Because they are so central to the economy and so enmeshed with government, they would have to be bailed out by taxpayers if they faltered.
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* It's not needed. Lenders will lend if they know they can unload the loans to Fannie or Freddie. They don't care where those loans end up. Fannie and Freddie want to hold more loans themselves because that's more profitable than securitizing and selling them.
•* It would reward bad behavior. Both companies, particularly Fannie, have a history of accounting irregularities. Just last year, federal regulators found that Fannie executives had engaged in "extensive financial fraud," doctoring earnings so they could reap bigger bonuses. To this day Fannie has not corrected its books.
•* It wouldn't address large loans. Much of the credit crunch is in jumbo loans, those for more than $417,000. Increasing what Fannie and Freddie can own in "conforming" loans would have no impact on the jumbo market.
Those who advocate a bigger role for the two companies argue that it could be twinned with more stringent oversight. Stronger oversight is certainly appropriate. Both companies, however, have enormous lobbying clout and a history of running to Congress to get regulators off their backs.
The bursting of the housing bubble raises plenty of troubling questions. But the answer isn't to reward Fannie and Freddie.
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