Monday, June 21, 2010
NYT on the Costs of Seizing Fannie & Freddie
Over the weekend this story by Binyamin Applebaum was featured on the front page of the New York Times: Cost of Seizing Fannie and Freddie Surges for Taxpayers.
CASA GRANDE, Ariz. — Fannie Mae and Freddie Mac took over a foreclosed home roughly every 90 seconds during the first three months of the year. They owned 163,828 houses at the end of March, a virtual city with more houses than Seattle. The mortgage finance companies, created by Congress to help Americans buy homes, have become two of the nation’s largest landlords. . . .
For all the focus on the historic federal rescue of the banking industry, it is the government’s decision to seize Fannie Mae and Freddie Mac in September 2008 that is likely to cost taxpayers the most money. So far the tab stands at $145.9 billion, and it grows with every foreclosure of a three-bedroom home with a two-car garage one hour from Phoenix. The Congressional Budget Office predicts that the final bill could reach $389 billion.
The article has some good vignettes of how the Fannie-Freddie "rescue" process is playing out in communities like the featured one in Arizona, where private contractors are paid to maintain, renovate, and try to resell the foreclosed homes. The article also gives a short but interesting background on Fannie and Freddie.
Fannie and Freddie increased American home ownership over the last half-century by persuading investors to provide money for mortgage loans. The sales pitch amounted to a money-back guarantee: If borrowers defaulted, the companies promised to repay the investors. . . .
“Our business is the American dream of home ownership,” Fannie Mae declared in its mission statement, and in 2001 the company set a target of helping to create six million new homeowners by 2014. Here in Arizona, during a housing boom fueled by cheap land, cheap money and population growth, Fannie Mae executives trumpeted that the company would invest $15 billion to help families buy homes.
As it turns out, Fannie and Freddie increasingly were channeling money into loans that borrowers could not afford. As defaults mounted, the companies quickly ran low on money to honor their guarantees. The federal government, fearing that investors would stop providing money for new loans, placed the companies in conservatorship and took a 79.9 percent ownership stake, adding its own guarantee that investors would be repaid.
The huge and continually rising cost of that decision has spurred national debate about federal subsidies for mortgage lending. . . .
I think the interesting question for the future is whether we are willing or able to reassess the idea of homeownership as the American Dream, and the extent to which we (over)promote homeownership as a public policy.