Opinion: Should the government own any part of the “good” Fannie and Freddie?

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Remember when the administration was mulling whether to create a ‘bad bank’ to help solve the financial industry’s problem with toxic mortgage-related assets? It eventually abandoned that idea in favor of creating public-private funds to buy the assets, a plan that’s gone pretty much nowhere. But there’s no keeping a bad bank down! Washington Post reporters Zachary A. Goldfarb And David Cho reported today that the administration may restructure Fannie Mae and Freddie Mac, pulling their (considerable) distressed investments into government-managed bad banks, with the feds gradually disposing of those assets for as much (or little) as they might be worth. The companies would be left with the mortgages and mortgage-related securities that are likely to perform. But what to do with these revitalized entities? The government controls majority stakes in the two companies now, although there are still some shareholders (whose holdings are worth less than 80 cents per share). According to Goldfarb and Cho,

If policymakers have learned anything from the subprime meltdown, it’s that the hybrid model doesn’t work. As the saying goes, it privatizes the upside and socializes the downside. There’s no such thing as an ‘implicit’ government guarantee -- if Wall Street pins its investing on the likelihood of a federal bailout, there will be a bailout. So let’s not do that again, shall we?

To me, the more important lesson of the housing bubble is that the massive government-chartered investment in mortgage finance hasn’t just been unnecessary, it’s been harmful. The GSE’s chased Wall Street banks into the market for risky loans, throwing gasoline onto a fire that was already burning out of control. In ordinary economic times, private investors provide a secondary market for home loans with no help from Fannie and Freddie (in fact, they’re competitors). And when credit gets tight and the secondary market dries up, the government has other mechanisms to spur mortgage lending. If the goal is to promote affordable housing, Washington can do that through tax subsidies, appropriations, guarantees for state bond programs and a variety of other measures that don’t reach the scale or risk of a Freddie or a Fannie. By the way, the latter announced today that it’s seeking $10.7 billion more from the taxpayers to cover a $15.2 billion quarterly loss. Here’s hoping the administration charts a path out of the housing-finance industry by cutting the government off completely from the ‘good’ versions of Fannie and Freddie.

-- Jon Healey