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I read an article in the Wall Street Journal on Thursday that was too good not to post. It discussed new legislation that would "replace mortgage giants Fannie Mae and Freddie Mac with at least five private companies that would issue mortgage-backed securities with explicit federal guarantees." The legislation was proposed jointly by a California Republican and a Michigan Democrat and is seen as a compromise between Republicans favoring a private system and Democrats who don't think the government should "abandon the mortgage market."
As far as the details, the companies would be required to hold more capital than Fannie or Freddie ever did, and will also have size caps on loans. Also, only "the mortgage backed securities that they issue-not the companies themselves-would enjoy federal guarantees." What do you guys think about this legislation? Do you think private is the way to go?
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Beth, do you have the link to this article?
ReplyDeleteYeah, they article would be helpful. By the way you described the legislation, it sounds like a pretty good plan.
ReplyDeleteDecreases the size of the firms - not too big to fail and increases capital requirements - decreases leverage. Both good things.
I'm a bit confused, though, you said that these companies will be issuing mortgage-backed securities...is that their only function? How will the government treat the actual mortgages (loans) that the firms issues? I think maybe there is something getting lost in translation.
Either way, sounds like a good plan. I feel much more comfortable with the government not running two huge firms.
I agree with Dane....the less huge firms the government runs, the better. There is already too much big time governement influence on these large firms. So it sounds like a good plan.
ReplyDeleteI agree with everyone else I like the idea of a privatized market.
ReplyDeleteHere is a link to the article:
ReplyDeletehttp://online.wsj.com/article/SB10001424052748704681904576317524068112278.html
I was interested to read that the two companies would operate like public utility companies, and not have exchange-traded shares.
I think there would be significant difficulties arising from the liquidation of Fannie and Freddie assets (trillions).
I like this idea a lot, but I'm skeptical of human nature tendencies. What will keep the firms from abusing their power? "Critics say the hybrid model risks recreating the same dynamics that led Fannie and Freddie to use their government ties to take risks that cost taxpayers."
ReplyDeleteBut it seems that the hybrid is really making strides to correct for the past mistakes, which is always good. "The firms will also pay a fee for government backing to finance a catastrophic insurance fund, much as the Federal Deposit Insurance Corp. levies fees and handles bank failures." "The approach signals policy makers' desire to usher more private capital into the mortgage market, where the government currently backs more than nine in 10 new loans." etc. etc.
Guess we'll just have to wait and see if/how it pans out
Again with the government guarantees.....I understand that the firms will be paying a fee for the security, but unless the fees equal the potential losses (which they never will), doesnt this amount to what AIG did? The US would essentially be acting as an insurance agent.
ReplyDeleteI agree, but we already acted in an insurance agent capacity with Freddie and Frannie.
ReplyDeleteThis idea of a privatized market is very interesting, however I think it will be difficult to implement. It seems like we are learning from past mistakes, but as Michelle mentioned human nature tendencies make this issue very skeptical. And if we are indeed learning from our past mistakes, why should our government act as an insurance agent again? I think we need to avoid those risks at all cost, and if need be then act as an insurance agent as a last resort.
ReplyDeleteI agree with Dane and Matt that a privatized system could help that wouldn't allow the lenders to get too big to fail. I can see where Michelle is coming from because I don't think there there will ever be a real solution to fix a failed system. Our greed as a population led to the idea that Americans don't seem to understand that buying a house is a privilege and not everybody needs to own a home. It is a shame that so many home buyers felt entitled to buy a home with little to no money down and terrible credit. The concept of saving seems lost on the majority of Americans.
ReplyDeleteI think legislation such as this is a step in the right direction. While going from 2 firms to 5 is not a huge progression, in terms of "too big to fail, moving to a privatized system that is backed by the government is enticing.
ReplyDeleteIt will be interesting to see further developments of this legislation.