Cut ’Em Loose With No Government Props

The Trump Administration is seriously considering privatizing Fannie Mae and Freddie Mac. It’s long past time that it did this. The business of these two giants is to bundle and sell mortgages to investors with a government guarantee. That is, investors are covered if there are losses because of homeowner defaults.

Washington, via the Federal Housing Finance Agency, took control of both entities in 2008 because of their massive losses. The seizures were called “conservatorships.” The takeover was supposed to be temporary, yet here we are nearly a generation later, and the conservatorships are still intact.

Fannie and Freddie are the elephants in the housing market, backing some $7 trillion in mortgages. They have an eye-popping line of credit with the Treasury Department of $254 billion. They charge a so-called guarantee fee of around two-thirds of 1% on each mortgage. Fannie tends to work with larger financial institutions, while Freddie goes with smaller ones. It’s a nice business. As President Trump noted, they are gushing cash.

Trumpites estimate the market cap of these two monsters would be $330 billion, with the government’s share coming to more than $250 billion. In these times of rivers of red ink in Washington, the prospect of getting that much cash without raising taxes should be irresistible.

The two got into trouble because they went heavily into debt. Why not, they figured. The higher the leverage, the bigger the profits, which shareholders loved. They could borrow at rock-bottom interest rates because there was an implicit government guarantee. It wasn’t written into law, but the markets figured Uncle Sam would come to the rescue if there were trouble. That ar-rived with the financial crisis that began in 2007, when the housing market was imploding. Washington stepped in. But shareholders were largely wiped out.

What made the two particularly complacent was their extraordinary political muscle, especially Fannie Mae’s. They made sure every member of Congress learned how important they were to constituents involved in local housing markets. And jobs were to be had for congressional relatives and friends.

The challenges of pushing Fannie and Freddie out of the Washington nest are real, but that shouldn’t deter the move.

Critics say changing the status quo will raise mortgage rates, a particularly sensitive topic at a time when housing affordability is a big issue. If Fannie and Freddie are to be truly private companies, they’ll need higher profits, which could lead to more expensive mortgages. Guarantee fees for mortgages would also likely go up.

This is why the Trump Administration doesn’t want to do away with guarantees, implicit or explicit. But this would put Fannie and Freddie back where they were when they got in trouble. If there are any guarantees, the two monsters should have to pay Uncle Sam realistic insurance fees, which would run into the tens of billions of dollars. Critics underestimate the power of competition. Instead, the two enterprises should be broken up. Competition works.

As for mortgage rates, the problem is the Federal Reserve, whose ignorance of inflation is keeping the cost ofmoney unnecessarily high.