Today the Treasury released a report on options for reforming the housing finance market, and specifically for winding down Fannie Mae and Freddie Mac. Secretary Tim Geithner has suggested that the plan is to end Fannie and Freddie in the next five to seven years.
The report includes three possible options for winding down Fannie and Freddie, which have already cost the taxpayers hundreds of billions of dollars in bailouts. The Atlantic‘s David Indiviglio has summarized those three paths, all of which, he thinks, “were variations on a clear theme: the government’s role in the housing market will be sharply reduced once a new policy is adopted.”
Although the winding down of Fannie and Freddie is a good thing, the report itself is a little short on details. Cato’s Mark Calabria writes that it is short on “real details,” and doesn’t address the fundamental problems of government intervention into the housing market:
…in many areas, the report makes clear that the Obama administration intends to keep the taxpayer on the hook for future losses arising from Fannie and Freddie. For instance, after assuring us that the GSEs will have sufficient capital to meet their obligations, including debt, the report tells us that such capital will not come from investors, but from the taxpayer. One has to wonder whether this report was written for the benefit of the Chinese Central Bank (one of the largest GSE debtholders) or for the benefit of the U.S. taxpayer.
Arnold Kling is thinking along the same lines:
Incidentally, the more I think about it, the more outraged I am by the sketchiness of their proposal. It takes up only a few paragraphs, and those are quite vague….
This puts me in the strange position of defending Freddie and Fannie. My first choice would be for government not to hand out any goodies. But if you are going to have the government hand out goodies, the ability of regulators to control the costs and mitigate the risks will be much greater if we revert to Freddie and Fannie than if we try something new. Under any arrangement, the hard part will be what I call “staying off the booze,” meaning keeping the government from guaranteeing riskier mortgages (second mortgages, cash-out refis, loans on investment properties, loans with low down payments, etc.) when house prices start rising again.