Nationalize Fannie Mae? It Worked Until It Was Privatized


In the past several days, before the U.S. Treasury Department acted to seize Fannie Mae and Freddie Mac, several people asked me if I thought it was a good idea for the government to "nationalize" the two mortgage giants. In virtually none of the coverage of the Bush administration's latest emergency action did anyone bother to tell the backstory. Fannie Mae, nee the Federal National Mortgage Association (FNMA), began life as a government invention. It was born "nationalized" -- and it worked beautifully until it was privatized.

FNMA was part of the New Deal's trinity of housing agencies -- the other two being the Home Owners Loan Corporation and the FHA agencies that Roosevelt formed in order to literally create the modern mortgage system. Before the New Deal, there were no long-term, self-amortizing mortgages. The loan was due and payable at the end of the term -- usually five years -- and if you couldn't persuade a bank or savings-and-loan to roll it over, you lost the house. After foreclosures exploded during the Depression, Roosevelt invented a whole new system. FNMA's job was to buy approved mortgages from banks, to replenish their working capital, so that they could make more mortgages. As the biggest buyer, FNMA also maintained standards.

The system worked like a fine watch. Home-ownership rates soared. Loan standards were generous but not stupid. Nobody in the home mortgage business got filthy rich, and mortgage lenders hardly ever went broke. The government's bank insurance funds regularly turned a profit. And here's a quaint, archaic concept: It operated in the public interest.

Then in 1968, as part of a general budget reform, government technocrats decided to get FNMA off the government's books. This was intended as a purely technical revision. It was tacitly understood that Fannie was to keep doing the same thing it always did -- buy mortgages from banks, turn them into securities, keep some and sell others, but maintain its standards and service to the public good.

It took about two decades for the wise guys to realize that there was big money to be made. And I am sorry to report that this was a bipartisan trough. In the Clinton era, many of the wise guys at FNMA were Democrats.

Criticism was limited to the Right and Left. The Wall Street Journal and libertarian think tanks regularly warned that Fannie was getting too big and too speculative with an implicit government guarantee. A few progressives like your faithful writer objected that FNMA's true purposes were being perverted and the system was being put at risk so that insiders could get very rich.

After 2000, Fannie also served to abet the subprime mess. For the most part, Fannie refused to buy the very worst subprime loans, but it was happy to buy so called "Alt-A" loans, which were a slightly milder version of the same abuse -- very risky loans with exorbitant interest costs (and profits) and almost nonexistent standards. Those loans are now going into default at almost the same rate as subprime loans.

Under private management, Fannie did a 180. It was perverted from a government-sponsored and well managed agency that served the public interest into a privatized casino whose big bets enriched a few insiders and then helped crash the entire system.

So now, the Bush administration is playing half-of-FDR. It is saving capitalism from itself as Roosevelt did -- but without getting serious about regulatory standards going forward. The taxpayers will bail out Fannie, but the rules for regulation of the mortgage system have yet to be written. That will await the next administration. And if the next administration is led by John McCain, the top financial guy is likely to be former Sen. Phil Gramm, the senate's biggest cheerleader for reckless deregulation.

Here is the cycle: The government invents something virtuous; the private market takes it over and loses hundreds of billions; the government then bails it out. This is best understood as socialized risk, privatized gain. Yes, the shareholders of Fannie Mae will deservedly lose a bundle -- it's always the shareholders who take a hit -- but the insiders who thought up subprime and the executives of Fannie Mae during the roaring '90s already made their pile.

Surely there is an Obama teachable moment here. It isn't even that complicated. To wit:

  • Ordinary homeowners got suckered so that a few fat cats could get very rich.

  • The needless damage to the mortgage sector has wreaked much wider harm on the economy -- causing other people to lose jobs, not get raises, lose health coverage and suffer losses to their net worth because of collapsing housing prices.

  • This was all the fruit of ultra-free-market ideology, as carried out by an opportunistic Wall Street-Washington axis.

  • In competent hands, government can do some things more reliably than Wall Street.

(That only took 84 words, less than a typical TV spot. This could also be the subject of a major, high-profile Obama speech, laying out all the gory details and drawing the lessons.)

What has Barack Obama said about the Fannie Mae rescue? Here's what the Obama campaign put out Sunday afternoon, the same day that a new USA Today poll was finding McCain ahead by 10 points among likely voters:
Given the substantial role that Fannie Mae and Freddie Mac play in our housing system, I believe that some form of intervention is necessary to prevent a larger and deeper crisis throughout our entire economy. I will be reviewing the details of the Treasury plan and monitoring its impact to determine whether it achieves the key benchmarks I believe are necessary to address this crisis.
First, this plan must not focus on the whims of lobbyists and special interests worried about their bonuses and hourly fees, but instead on strengthening our economy and helping struggling homeowners who are also being hit by lost jobs, stagnant wages and spiraling costs of everything from gas to groceries. Second, the plan must protect taxpayers, not bail out the shareholders and management of Fannie Mae and Freddie Mac. Third, once we ride out the current crisis, the plan must move toward clarifying the true public and private status of our housing policies. In our market system, investors must not be allowed to believe that they can invest in a "heads they win, tails they don't lose" situation.
That's it. The entire statement.

He'll be reviewing the details of the Treasury plan and monitoring its impact to determine whether it achieves the key benchmarks ... ? Gawd, did they hire John Kerry's second-string 2004 speechwriter? That would put even a policy wonk to sleep.

I will be reviewing the Obama campaign and monitoring its impact -- to see whether these people get off their fannies.

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