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How worried should we really be about the institutions who finance most of our home loans …
“It’s a scandal — but how much of one?”*
These are the two institutions that make up most of the home loans in America. They were created to make it easier to get a home mortgage from banks, thus, freeing up bank cash that could be used to make loans. If you believe the headlines, these institutions — Fannie Mae (The Federal National Mortage Association) and Freddie Mac — may be at risk However, at least one economic expert, Paul Krugman, takes a contrarian position which he explains very clearly in his New York Times article “Fannie, Freddie and You”.*
According to Krugman:
The storm over Fannie and Freddie is “overblown”.
“While Fannie and Freddie are problematic institutions, they aren’t responsible for the mess we’re in”
“They have “peculiar status: although they’re private companies with stockholders and profits, they’re ‘government-sponsored enterprises’ established by federal law, which means that they receive special priviledges. The most important … is implicit: it’s the belief of investors that if Fannie and Freddie are threatened with failure, the federal government will come to their rescue…This means that profits are privatized but losses are socialized…If [they] do well, their stockholders reap the benefits, but if things go badly, Washington picks up the tab.”
“Such one-way bets can encourage the taking of bad risks … But here’s the thing: [they] had nothing to do with the explosion of high-risk lending a few years ago … [they] curtailed their lending just as housing prices were really taking off. Also, they didn’t do any subprime lending, because they can’t… [that] loan didn’t meet the requirement, imposed by law.
“How did they end up in trouble?…anyone who borrwed to buy a house at the peack of the market probably has negative equity at this point…The result is a rising rate of delinquency even on loans that meet Fannie-Freddie guidelines. Also, Fannie and Freddie, while tightly regulated in terms of their lending, haven’t been required to put up enough capital – that is, money raised by selling stock rather than borrowing. This means that even a small decline in the value of their assets can leave them underwater owing more than they own.”
“… [their many scandalous] political machinations didn’t play a significant role in causing our current problems.
” Still, isn’t it shocking that taxpayers may end uyp having to rescue these institutions? Not really. We’re going through a major financial crisis — and such crises almost always end with some kind of taxpayer bailout for the banking system.
“…[they] can’t be allowed to fail. With the collapse of subprime lending, they’re now more central than ever to the housing market, and the economy as a whole.”
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