Imagine there is no Fannie Mae, Imagine there's No Freddie Mac

It is hard to concentrate at work today, what with the developing crisis in the financial markets. Fannie Mae and Freddie Mac, the nation’s largest purchases of home mortgage securities, are spiraling downwards. What will be done about it? Will the regulators abandon their free market posture? Will Freddie be taken over? How would it be done? The questions go on and on.

People should be worried. The experts are not lying about the interconnected nature of our economy. Yes, have a very healthy economy in many ways. We have the rule of law, we have an exceptionally talented workforce, we have universities and hospitals and many beneficial institutions. Nonetheless, our mortgage market acts as one of the pillars of all that activity. Fannie and Freddie are the corner beams that keep it all together.

One way to imagine what it would be like, without them, is to look at manufactured housing. Neither agency has been active in buying securities made from manufactured housing loans. Yes, there are some programs where Fannie and Freddie participate. Those tend to be through special relationships, or for limited types of ownership arrangements. For example, the GSEs will buy homes with land owned by the same person as the unit.

That doesn’t do much for the millions of American households that live in land-lease arrangements. These are known often as “trailer parks.” A few private firms do buy the asset backed securities made from loans on manufactured housing. US Bank is a big player in this market, as is Wells Fargo, and Berkshire Hathaway. It might be comforting that the institutions who choose to invest in manufactured housing abs also happen to institutions that are emerging as “survivors” in the current crisis. Its a market without GSE participation, but with some corporate demand.

That is not much different from what could be on the horizon for single family site built homes in the United States if Fannie and Freddie collapse. Now, that’s a dire scenario and it hasn’t happened yet. Nor do any of our leaders appeared to be inclined to let it happen.

Nonetheless, the impacts that such a de facto policy of non-participation by the GSEs in manufactured housing paint a compelling motive for action. Manufactured housing is often criticized as a “depreciating asset.” One of the chief reasons for that is the lack of liquidity for loans made on used mobile homes. Its a cash market, sort of like the market for condominiums in Argentina.

And that drives down prices. If you live in a $300,000, maybe after Freddie goes down, you live in a $200,000 house. Oh, and you have a $15,000 ($1.5 trillion/number of U.S. households) mortgage on your share of that GSE debt that the government just assumed on your behalf.