Fannie and Freddie

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Felix Salmon — tanned, rested, and ready — reads three op-eds about Fannie Mae and Freddie Mac in the New York Times today and comes away unimpressed. Whatever you might think of Fannie and Freddie, they aren’t going away anytime soon:

The fact is, as John Carney says in his own op-ed (the most sensible, but also the narrowest, of the three), that the FHA and Frannie now back more than 95 percent of new mortgages. If they simply stopped buying new mortgages, the entire housing-finance business in the US would come to a screeching halt. No one could buy, no one could sell, and home values would be entirely hypothetical for years.

Yes, it’s possible to slowly build an entirely private system of mortgage lending. But you can’t do that overnight, as Poole seems to think. And he’s completely wrong, too, when he says that “if the home finance market were fully private, then it would bear the losses from its own mistakes in pricing and insurance”. Not true: when there’s a major housing crash, the government ends up bailing out the lenders whether they’re public or private. Look at Ireland.

Two thoughts come immediately to mind. First, the only reason Fannie and Freddie are semi-public institutions in the first place is because the private markets wanted nothing to do with buying up mortgages when the idea was first broached. The original plan was that the FHA (created in 1934) would guarantee home loans and private industry would then step in to create a secondary market. But private industry wasn’t interested, so in 1938 Fannie Mae was created to do it instead. So the question is: what’s changed since then? If private industry wasn’t interested in 1934, what makes us think they’d be interested now?

The answer, of course, is that lots of things have changed. But that’s a two-edged sword and it leads to the second obvious thought: most European countries don’t have anything similar to Fannie and Freddie, and they still manage to sell lots of houses there. There are pluses and minuses to the European model (and there have been proposals in the past to create an EU-wide GSE like Fannie and Freddie), but still, the fact that the European housing market exists and works adequately suggests that the U.S. could get by without Fannie and Freddie if we wanted to.

But, as Felix says, we probably can’t get rid of them too quickly. We don’t need another housing bubble, but neither do we need another housing crash. So while a private secondary market might be able to take Fannie and Freddie’s place, it’s going to take a while to create one that keeps the housing market working smoothly. In the meantime, we should concentrate on workable foreclosure reform and sensible housing policies, not bubble-era stuff like $1000-down mortgages. Fannie and Freddie need to be taken care of, but there’s no rush.

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SIX TRUTHS

Reclaiming power from those who abuse it often starts with telling the truth. And in "This Is How Authoritarians Get Defeated," MoJo's Monika Bauerlein unpacks six truths to remember during the homestretch of an election where democracy, truth, and decency are on the line.

Truth #1: The chaos is the point.

Truth #2: Team Reality is bigger than it seems.

Truth #3: Facebook owns this.

Truth #4: When we go to work, we're in the fight.

Truth #5: It's about minority rule.

Truth #6: The only thing that can save us is…us.

Please take a moment to see how all these truths add up, because what happens in the weeks and months ahead will reverberate for at least a generation and we better be prepared.

And if you think journalism like Mother Jones'—that calls it like it is, that will never acquiesce to power, that looks where others don't—can help guide us through this historic, high-stakes moment, and you're able to right now, please help us reach our $350,000 goal by October 31 with a donation today. It's all hands on deck for democracy.

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