
How Freddie and Fannie Are Held Captive - hvo
http://www.nytimes.com/2016/05/22/business/how-freddie-and-fannie-are-held-captive.html?src=me&_r=0
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wheaties
The biggest issue is the structure of the mortgage finance industry. They've
grown so dependent upon Fannie and Freddie that there does not exist a good
private alternative who can compete on equal terms. And who can blame them? I
wouldn't want to buy a 30yr loan paying ~4% interest. They sell those loans as
fast as they can and collect their fee.

There's also a reluctance of the political parties to scale them back due to
the repercussions it would have on home buyers. Who wants to be known as the
candidate that stopped X from buying a home?

~~~
jhulla
These days, a significant portion of the mortgage industry is built on rapidly
transferring risk onto the Federal Government. Even though agency bonds are
sold on the open market, after 2008, we all know those are effectively insured
by the Federal Government.

This is a way to pass free money to everyday homebuyers.

~~~
maxerickson
The money arguably ends up in the hands of the sellers. The buyer maybe gets a
little more buying power (but the people they are competing with are getting
that too).

~~~
shostack
Not really, at least in competitive markets like the Bay Area. The buyer has
an increasing need to anti up more of a downpayment because of inflating home
prices. So while the financing is easier and they can leverage themselves
more, they still need to come up with a quickly growing chunk of change to
even take advantage of the cheap debt.

~~~
maxerickson
Are you agreeing with my parenthetical?

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shostack
I was just clarifying that while the buyer in theory has more total buying
power (so yes, I agree there), it is all on the debt side. Their buying power
from a cash standpoint has, if anything, worsened, because of housing cost
inflation and the extra downpayment they need to have saved up.

In this market with cheap debt, there's a large number of HENRY's (High
Earner, Not Rich Yet) who can afford the mortgage payments, but are perhaps
too young to have had a chance to have saved up the necessary downpayment
without help from families and such.

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jhulla
Freddie and Fannie were the epitome of privatize the profits and socialize the
losses.

Since inception they've benefitted from lower capital and mortgage insurance
costs due to their implicit government backing. In return, they've accepted
substantial oversight from the government in regards to their loan acceptance
standards.

The 2008 rescue and then QE where the Fed bought Agency debt by the billions
made the implicit government guarantee very, very real.

When Fannie and Feddie went insolvent, Congress and the Obama administration
as the rescuers had the opportunity to completely wipe out the public
shareholders and take over the companies. This is what should have been done.

Instead, we now have zombie public companies whose profits are siphoned off
through political agreements instead of explicit contracts open to public
scrutiny.

~~~
pcarolan
The article is making the case that they've become socialize the losses and
socialize the profits... and goes on to say that this is somehow bad because
shareholders. It seems to me that the status quo is a good compromise if you
believe in the original intent of subsidizing American home purchases.

~~~
jhulla
Public companies socialize their profits through tax, legal, labor and
regulatory compliance. According to the article, Fannie and Freddie are being
hit above and beyond those. This is quite unfair to the public shareholders.

If Congress wants the public benefit, then Congress and the White House should
have wiped out the public shareholders in 2008 and taken over the companies.

~~~
tosseraccount
Share holders essentially were wiped out and the government did take over
Fannie and Freddie. The remnant equities have very little value. Only people
interested in the last 8 years are lawyers hoping to get paid off.

What they should do is auction off the assets, pay off their creditors and let
the banks, credit unions and other organizations manage the risk.

There's plenty of competition in the lending business.

~~~
pcarolan
Why? We got into this mess because the banks couldn't manage the risk and we
had to bail them out.

~~~
tosseraccount
Banks got into it _because_ the government was guaranteeing it.

Make a loan, collect the fee, dump the junk on the tax payer.

Government enabled and subsidized this. And still does. Home loan deductions,
anybody?

We didn't have to "bail them out". We should have let them go chapter 11.
Plenty of folks with responsible finances could have bought up the assets.

~~~
collyw
It happened to banks outside the US, where they weren't guaranteed (but did
get bailed out).

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devishard
I do think that shareholders simply should have lost their shares when the FMs
failed--that's what happens to any other business that's fails. Why would they
be exempt just because their failure was big enough to be catastrophic?

And nothing has changed. Just because the government didn't explicitly take
away their shares doesn't mean they are suddenly entitled to the profits that
the public investment in their companies has reaped.

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dikdik
It's like Freddie and Fannie took out a student loan! They're finally making
good money, but those interest rates man.

