A Critical Response to the President’s Proposal for Fannie Mae and Freddie Mac

On Tuesday, the President gave a speech in Phoenix, Arizona on homeownership and the rebounding housing market. While laying out action steps for repairing the housing market and promoting homeownership, the headline from the President’s speech was his proposal to wind down Fannie Mae and Freddie Mac, and that “private capital should take a bigger role in the mortgage market.”

As government chartered entities, Fannie Mae and Freddie Mac have long been the biggest players in the secondary mortgage market through buying, pooling and securitizing mortgages to increase the supply of money available for mortgage lending and increase the money available for new home purchases. Consequently, both entities set much of the standard for the entire market.

Both companies were government chartered, but became private corporations in 1968 and 1970, and were subsequently traded on the NYSE. Massive losses in recent years and fears of instability in the housing market prompted the federal government to put both companies under “conservatorship” in 2008, and were given an infusion of capital by the Treasury Department. In 2010, the Treasury Department floated possible plans for dealing with Fannie and Freddie, even suggesting the possibility of winding them down.

In late 2010, a coalition of over 20 civil rights organizations drafted a response to the administration’s proposal critical of any possibility of winding down Fannie and Freddie. The President’s speech not only sets a clear course for his administration’s for Fannie and Freddie, but for the future of the secondary market and the dream of homeownership.

The winding down of Fannie and Freddie would have tremendously negative consequences not just for marginalized communities and families starved of credit by traditional redlining, and subsequently targeted by subprime lenders, but all American families seeking entry to the middle-class and the dream of homeownership. That is not to say that homeownership for all Americans should be a policy goal, but relying more on private markets will lengthen the rungs on the ladder of opportunity and keep that dream out of reach for more Americans.

We are greatly concerned about the administration’s orientation and policies geared toward reducing government footprint in the housing market and getting private capital markets more involved. The assumption behind these policies is that government is overly involved in the housing market. This view is not only mistaken as a matter of policy, but is mistaken as a matter of history.

The sharp demarcation between government and private markets is a false one. From the GI Bill, to the FHA, to before the New Deal, government policy has always been a key driver and expander of housing opportunity. Freddie and Fannie have been vital instruments of expanding the American dream. The narrative that the government has been overly involved as of late misunderstands both history and the nature of the financial crisis. The treasury must not lead the effort to wind these entities down, but must instead lead the effort to restore them to health and serving the housing market in the U.S. The President’s proposal is a potentially devastating advance in the wrong direction.

The ideas expressed on the Haas Institute blog are not necessarily those of UC Berkeley or the Division of Equity & Inclusion, where the Haas Institute website is hosted. They are not official and not of one mind. Thoughts here are those of individual authors. We are committed to academic freedom, free speech and civil liberties.