Fannie, Freddie, and the Aftermath of the Financial Crisis

The Independant Institute Fannie Mae and Freddie Mac—officially the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, respectively—played a key role in igniting the unsustainable housing boom that precipitated the recent financial crisis. These government-sponsored enterprises were instrumental in encouraging the funding of risky residential mortgage loans, and they stonewalled efforts to investigate their operations. Why are they still in business? Vern McKinley, a research fellow at the Independent Institute and the author of Financing Failure: A Century of Bailouts, raises this vital question in The Hill’s Congress Blog.

In 2008, then Treasury Secretary Henry Paulson and the Federal Housing Finance Agency (FHFA) moved to place Fannie and Freddie into conservatorship. As McKinley notes, this was a courageous measure, because although the two government-sponsored enterprises were deeply insolvent, they were politically powerful. They had lobbied members of Congress long and hard for special privileges, and they had taken to publicly insulting their critics, calling them “economic pencil brains.” Unfortunately, placing Fannie and Freddie into conservatorship was too little, too late. “Even today, they resist full transparency with the FHFA and its Inspector General and retain elements of their longstanding cavalier approach to risk management,” McKinley writes.

What should be done? Some policymakers have called for fiddling with Fannie’s and Freddie’s governance and operations, but a much better alternative would be to put them into receivership and wind them down. The FHFA has had the authority to do this since 2008. Moreover, there is a historical basis for believing that this could be done effectively: in the late 1980s and early 1990s, the Resolution Trust Corporation succeeded in placing hundreds of insolvent savings and loans into receivership and transitioning them to private ownership. Putting Fannie and Freddie into receivership would allow them to be broken up into smaller companies and transferred back to private hands. Critics argue that doing this would jeopardize the recovery of the housing market, but as McKinley notes, these are the same critics who mistakenly claimed that placing Fannie and Freddie into conservatorship would devastate the housing market. “Given its track record, we have to stop listening to that discredited crowd,” McKinley concludes.

Financing Fannie and Freddie’s Failures, by Vern McKinley (The Hill’s Congress Blog, 2/1/12)

Financing Failure: A Century of Bailouts, by Vern McKinley