The U.S. government’s takeover of Fannie Mae and Freddie Mac is the most recent sign that something has gone terribly wrong in the nation’s mortgage industry. Still, policymakers and regulators must not give up on the agencies’ mission – and risk further destabilizing the housing market – by acting rashly.
Signs of the current crisis have been obvious to all in the volume of foreclosures, shrinking credit access and bailouts of financial institutions. Less visible to the general public was the fact that foreign investors were reluctant to continue funding Fannie and Freddie without some explicit reassurance by the federal government. In response, the government made the decision to place the two agencies in conservatorship.
The temptation for many commentators is to talk about Fannie and Freddie as a mortgage-market version of Enron. But these agencies did not cause the credit crisis, nor did their promotion of affordable housing. Reckless lending by mortgage originators and poor regulation contributed to a house-price bubble and over-leverage by many households.
Fannie and Freddie’s core functions of providing liquidity and affordability were, and continue to be, as critical to the functioning of the market as ever. Over many decades, Fannie and Freddie have provided access to long-term, fixed-rate mortgages at a scale unrivaled anywhere else in the world. This has been critical for low- and middle-income home buyers by providing them with a stable, affordable means to buy and maintain their homes. They have also played a key role in the affordable multi-family housing market.
With the Federal Housing Finance Agency now at the helm of these two entities, the government controls close to half of all the outstanding mortgages in this country. Officials and policymakers are therefore in the strongest position to prevent further deterioration in the mortgage market.
Clearly, reform is needed, but any action with respect to these agencies must be accompanied by three additional priorities. First, policymakers must take up the challenge to reform mortgage markets to protect the consumer. Second, financial and political entities alike must work to stave off foreclosures and work with distressed borrowers to prevent further instability in the housing market. Finally, we must get a serious housing policy in place to ensure that homeownership remains a path by which Americans can build economic security.
With debt holders reassured and mortgage rates improving, policy makers should proceed with urgency to stabilize the housing market by minimizing home losses through foreclosure and encourage access to safe and affordable mortgages. Taking drastic measures to restructure the agencies entirely will not solve the current crisis and may in fact do irreparable harm to Fannie’s and Freddie’s ability to continue to fulfill their invaluable role over the long term.
Essay published in “Talk Back,” The (Raleigh, N.C.) News & Observer, Sept. 14, 2008
Dr. Roberto G. Quercia
Director, UNC Center for Community Capital
Professor, Department of City and Regional Planning
College of Arts and Sciences, The University of North Carolina at Chapel Hill
(919) 843-2140
