A false friend :Why governments should stay out of the mortgage business
Feb 1st 2015 | Business and finance
IN THIS week’s print edition, we explore how mortgage subsidies have encouraged banks to lend more to homeowners and less to firms, with pernicious economic consequences. The Economist has long been a critic of such handouts. Back in 2000, we pointed out that implicit state guarantees for Fannie Mae and Freddie Mac, mortgage insurance giants, may do serious damage to the American economy if they take on too much risk. The federal takeover of the two firms in September 2008 as a result of the subprime mortgage crisis suggests we were right to be worried.
Fannie, Freddie
America’s government should get out of the mortgage business
Apr 15th 2000
FANNIE and Freddie sound like a sweet couple living down the street. But in America they are more likely to own the mortgage on your and your neighbours’ house. For Fannie Mae and Freddie Mac are two of America’s biggest financial institutions—and also two of its most indebted, with around $1 trillion of debt between them. Fannie Mae is the Federal National Mortgage Association, Freddie Mac the Federal Home Loan Mortgage Corporation. They dominate America’s mortgage market, a pre-eminence that is becoming controversial because these “federal agencies” are assumed (despite official denials) to be guaranteed by the government (see article).
Fannie and Freddie stand accused of using their “government guarantees” to steal business from unambiguously private lenders. One think-tank, the American Enterprise Institute, says they are on course to “nationalise” the mortgage market. Some congressmen now wish to change the law to tame these monsters before they stick the taxpayer with a bill reminiscent of the savings-and-loan bust in the 1980s.
The original idea behind Fannie and Freddie was innocuous enough. It was to provide liquidity to mortgage lenders, and so help people to buy homes, at a time when private markets could not stump up enough money. But today the financial markets are more than able to deliver. What the federal mortgage agencies do now is to distort the private market. This is a perfect example of what people mean when they talk of moral hazard caused by government intervention.
https://www.economist.com/news/business-and-finance/21641660-why-governments-should-stay-out-mortgage-business-false-friend?fsrc=scn/tw/te/bl/afalsefriend
