The Dodd-Frank financial reform bill, which is meant to prevent future financial crises, doesn’t mention the primary instigators of the subprime mortgage catastrophe, but Washington is now wondering what to do with Fannie Mae and Freddie Mac.
Together these institutions either provided or purchased half of all subprime mortgages in the United States. They were created to provide affordable housing to low-income families and racial minorities. The unintended consequence of this policy was to spike housing prices during the first decade of this century; a bubble that started to deflate in 2007 and nearly tumbled in the entire financial industry the following year.
Banks were bailed out during the crisis. Fannie and Freddie were nationalized. The White House missed a deadline at the end of January to tell Congress what it wants to do with the companies. The New York Times reports that the administration intends to unveil a report as early as Friday, listing options without stating a preference.
The preference should be clear. Fannie and Freddie need to go. It’s not the government’s job to provide “affordable housing.” It’s not the government’s job to provide any kind of housing.
Fannie and Freddie must not go back to the ambiguous semi-private, semi-public status that they had before the meltdown. That was part of the problem! Because banks assumed that Fannie and Freddie would be bailed out by the government in the event of a crisis (and they were), they took on more risk than they should have had.
Auction off Fannie’s and Freddie’s assets. The United States government shouldn’t be in the mortgage business.