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Obama: Forget about that GSE Thing

Adam Rust's picture

Posted February 9, 2011

If ninety percent of home mortgages are purchased by two entities, then why would now be a good time to shut them down?

There is an article in today's Wall Street Journal which reports that President Obama is ready to eliminate Fannie Mae and Freddie Mac. The plan is supposed to be contained within a "white paper" that is traveling around the White House right now. Although several plans are supposed to be in play, the idea would call for a gradual roll back of Fannie and

Freddie.

Soon to be under water.

One possible impact: a massive destruction of middle-class wealth as existing homeowners witness a direct drop in the value of their homes. Any realtor will tell you that a home is only worth what someone will pay. In this new post-GSE environment, tight liquidity coupled with larger downpayment requirements and higher interest rates will curb what anyone can offer to pay.

Another impact: millions of unemployed Realtors. Another: less "taxables" for municipal governments.

Even the less-onerous options involved a much more limited role for Fannie and Freddie. Rather than buy mortgages, the GSEs would be limited to backstopping loans. In one idea, the backstop would only take place when the market was stalled. In the other, it would be permanent.

For a long time, the GSEs have had a "duty to serve" that required them to encourage accessibility to homeownership in their approach to purchasing mortgage securities. This is one goal that probably wouldn't be sacrificed, because home prices would fall so much that they'd suddenly be a lot more affordable!

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