Government’s Overwhelming Role in Mortgages

92% — The share of new mortgage loans backed by the U.S. government One of the most crucial issues in safeguarding the U.S. against another financial disaster is figuring out what to do with Fannie Mae and Freddie Mac, the giant mortgage firms the government bailed out in the midst of the financial crisis. Given how deeply the government has waded into the mortgage market, it won’t be an easy task. Fannie alone ranks as the world’s largest bank by assets, while Freddie is in the top ten. The firms’ subsidized mortgages encourage Americans to take on a lot of debt. Their balance sheets, consisting of long-term investments financed with short-term borrowing, make them highly susceptible to sudden credit freezes. Their government ownership means taxpayers stand to lose tens of billions of dollars if the firms get into trouble again. On Friday, the U.S. Treasury published a “white paper” with some ideas on how to handle the behemoths. Fannie and Freddie can curb borrowers’ ability to get too deep into debt by requiring larger down payments and lowering loan limits. They can increase the fees they charge for mortgage guarantees to bring those fees more in line with the risk they’re taking on. And they can gradually wind down their businesses, ceding the market to private lenders who must have ample capital to protect them from bankruptcy in the event of losses. All that can help remove market distortions and save taxpayers’ money.

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