Friday, September 12, 2008

Do We Even Need Fannie and Freddie?

Does the United States even need organizations like Fannie Mae and Freddie Mac? Most developed countries don't have such organizations. Why do Americans assume they are necessary for a functioning mortgage market? Professor Richard Green ponders, "What has been the real benefit of Fannie and Freddie?"
It is almost certainly not homeowning, and it is almost certainly not funnelling money into underserved neighborhoods or toward underserved borrowers.

Rather, is has been the transfer of interest rate risk from households to investors. So far as I know, the US is the only country in the world with long-term, fixed-rate, 95 percent LTV loans that do not have prepayment penalties. When interest rates rise, borrowers are protected; when they fall, they are not made immobile by yield-maintenance and lockout clauses. The low down payments (and five percent equity seems to be OK) effectively give households with modest incomes access to capital markets. I have written elsewhere that I believe that the peculiar structure of Fannie and Freddie has helped bring about the unique American mortage.

One could argue that the current environment shows that none of this has been worth it. But I would disagree with that argument.

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