Fannie Mae, Freddie Mac, And The Housing Crisis

Housing prices may not return to pre-credit crisis levels for another five years, so experts say. They may never recover to those levels at all in  hard-hit areas such as Las Vegas and South Florida.

The federal government has tried to keep people in their homes though programs like HAMP. It was a failure and accomplished only 10% or 20% of its goals to save people from default and foreclosure. Complex paperwork was to blame, at least according to the HAMP supporters.

The tax credit on home purchases which expired last April helped drive home sales. It lapsed and sales slumped. The federal government did not renew it. An extension might have propped home prices, or at least have kept them from the sharp drop which is still in progress.

The Administration and Congress will examine how Freddie Mac and Fannie Mae can be dismantled. Their survival has already cost taxpayers close to $400 billion and that will increase.

The Wall Street Journal reports plans would include “gradually reducing the government’s footprint in the mortgage market.” Fannie and Freddie now handle over eight in ten home mortgage originations, so the first reaction of many economists is that without them the housing crisis will worsen.  Unfortunately, no one knows when the time is right to pull the plug on Fannie and Freddie.

The government argues that the two operations would be shuttered over a period of a number of years. That process may still be shorter than the housing crisis is, so a prolonged dismantling may still undermine the market recovery which may still be going on a decade from now.

The dilemma that the government faces does not go away if Freddie Mac and Fannie may do not exist in five years and taxpayers are no longer supporting them. A withdrawal of support for housing at the federal level is still likely to cause a new dip in home sales even if that occurs in 2015, 2016, or 2017. Home prices will always be critical to the fortunes of most Americans. The US economy cannot recover without a nearly complete reversal in the drop of home prices. The argument against that is people will build equity in the stock market or by investing in gold or platinum instead of waiting for rising house prices. That idea looks good enough on paper, but the S&P 500 cannot go up forever.

The federal government’s support of mortgage origination is essential. Taxpayers can cover the cost of support of housing in the money they give to the government to support Fannie and Freddie or they can suffer through a period of the home price crisis that will last years. Neither choice is palatable, but the housing market is large enough so that without support the entire economy suffers greatly.

Douglas A. McIntyre