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Steve Forbes
In Hollywood a good box-office monster is never permanently killed; it re-emerges in a sequel to wreak havoc once more on the citizenry. American taxpayers will soon have the same feeling of horror: Fannie Mae and Freddie Mac are climbing out of the swamps. The economy and taxpayers' wallets will once again be hit up.
Fannie and Freddie, of course, crashed in 2008, after guaranteeing some $1.5 trillion in junk mortgages. They are still haemorrhaging red ink today, which is why the Obama Administration on Christmas Eve removed the ceiling on cash that these two so-called government-sponsored entities (GSEs) can receive from Uncle Sam. Taxpayers might have thought that given their spectacular collapse--and the accounting scandals preceding it--these entities would disappear into the night. Think again.
Fannie and Freddie now dominate the housing market as never before: There has been a dramatic shift to government dependence for mortgages. Unless lenders can have mortgages packaged together and sold to other investors the amount of money going into housing--even as the economy recovers--will be inadequate. Securitization has a bad reputation these days, but the innovation--sensibly used--does lower the cost of borrowing by spreading out risk. And it efficiently facilitates tapping pools of capital.
The Treasury Department and the White House have done enormous damage to the housing industry by muddying the distinction between various classes of creditors who lend money. Normally a first-mortgage holder takes a lower rate of interest, because it has first-call on the asset if the borrower defaults. Second mortgages and home equity loans are back in line but are compensated with higher rates of interest. In the name of helping homeowners the Administration has decreed that all creditors must take a haircut, regardless of what previous customs and laws provided. These unilateral actions combined with the White House's brazen political restructuring of Chrysler and GM have damaged the securitization markets for consumer loans--credit cards, autos and the like--as well. This, too, will harm future economic growth.
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