The Next Act in the Reform Drama -- Fannie and Freddie
March 24, 2010
Even as reform of Wall Street entities continues to wend its way through Congress, the spotlight has shifted to the next act in the regulatory reform drama, which involves what are formally known as Government Sponsored Entities (GSEs), but which are more familiarly called Fannie and Freddie.
Fannie Mae and Freddie Mac are entities that purchase mortgages as part of government-sponsored programs. They started life as government agencies, but over the years acquired a weird, hybrid status. They became independent, for-profit companies, but their obligations were implicitly backed by the federal government.
This arrangement proved to be disastrous. Their for-profit status gave the GSEs an incentive to be as aggressive as possible about generating business, so they did not provide rigorous enough standards to the loans they were insuring. At the same time, the government's implicit backing helped cushion the impact from the inevitable consequences of that laxness.
Now, both the House Financial Services Committee and Treasury Secretary Timothy Geithner have started to talk about the importance of reforming the regulation of these entities. From the nebulous state of reform proposals so far, it appears that actual action is still a long way off. Even so, it can't come soon enough.
The government remains thoroughly tied up in orchestrating the recovery of the housing market. Even as it plans to scale back its direct intervention in the mortgage market, continuing to keep short-term interest rates low is a way of helping beef up bank profits on mortgage loans.
Any bank depositor can tell you the result of this -- low savings account rates, money market rates, and CD rates mean depositors are effectively paying for the past abuses of the mortgage lending system.
