The Federal Government Saves The Day (Again)

An interesting article in today's Wall Street Journal by James Hagerty, regarding the mortgage crisis, discusses how Freddie and Fannie Mac have been acting as the economy's flywheels, and keeping the subprime mortgage crisis manageable.

The most important thing that the government does is to create, and impose, uniform standards. Without those standards, things fly apart. In the 1930's, 1920's-era private pensions failed, in part, due to lack of standards. Social Security helped immensely with rebuilding that portion of the economy, because of its standard-setting role.

Today, Freddie and Fannie Mac, widely-disliked on Wall Street, and seen as socialistic remnants in the home mortgage business, have been going about saving investor's bacon. Give it up for the Federal Government, folks!

The article is available here, among other places:

Then the post-tech-bubble, post-9/11 housing boom arrived, and Fannie and Freddie seemed destined to recede into a smaller, perhaps even marginal, role. Wall Street investment banks started dominating the lucrative business of bundling home loans into securities for sale to investors world-wide. Total U.S. residential mortgage debt outstanding swelled to $10.3 trillion at the end of 2006, nearly double the level of six years before. Fannie CEO Daniel Mudd recalls that some wondered, "Are these guys relevant anymore?"

Now the debate in Washington has shifted 180 degrees. "If these government-related entities were not in place, this [mortgage-default crisis] would be a disaster of far greater dimensions," says Susan Wachter, a finance professor at the University of Pennsylvania's Wharton School, who was a senior housing official in the Clinton administration and has done consulting work for Freddie. She notes that the companies kept money flowing into mortgages even at the height of investors' panic in August.

Fannie and Freddie bring uniform standards to the mortgage securities they back, making the securities easier to trade and value, Ms. Wachter says. The trillions of dollars of mortgage securities that were sold without their involvement during the housing boom didn't have uniform quality and have proven illiquid because investors find it hard to assess the risks.

Doug Duncan, chief economist at the Mortgage Bankers Association, says the market for these "nonagency" mortgage securities eventually will recover, but only once investors feel they have better information about what kind of loans back the securities.