Recently the stocks of Freddie and Fannie tumbled. The Feds came to the rescue as they did in the subprime debacle. The Housing Bill promises a $25 billion bailout. According to Bloomberg, the Treasury promises another $30 billion. The assumption of this bailout is that the current problems are just temporary glitches that a few tens-of-billions can fix.
Don’t expect much help from our representatives until many billions are spent on unsuccessful bailouts. Freddie and Fannie have spent more than $200 million on campaign contributions and lobbying in the last decade. According to NPR, they hold the record fine for illegal contributions – $3.8 million. The bailout will eventually stop. Freddie and Fannie hold over $5 trillion in mortgages. The current budget deficit is only about half-a-trillion and the national debt is only $9.5 trillion.
Certainly Freddie and Fannie have demonstrated that such a private-government hybrid enterprise is an unholy alliance. They use government coercion to raise house prices then make money from "private" stock.
According to former Fed chief, Alan Greenspan on CNBC, "You cannot have a type of organization which is half public, half private. Essentially, the profit turns out to be for the private sector and the losses are socialized."
Greenspan neglects to mention that by creating stocks that offered high earning at "guaranteed" low risk, Freddie and Fannie sucked many billions of dollars from capital investment markets. Actually, the government never explicitly guaranteed the stock of Freddie and Fannie. Their "implicit guarantee" came by winks and nods from brokers saying that Freddie and Fannie were too big to fail.
It makes sense to have the government guarantee T bills, and saving accounts. Such instruments are low interest and should have zero risk. It makes no sense for the government to insure "growth stock."
From their inception, Freddie and Fannie have left a trail of irregularities and minor scandals in the financial press. Around 2003 more problems began to surface in the regular news. The mortgage meltdown only intensified the problems. The current structure of Freddie and Fannie guarantees that they will fail just as the savings and loans they replaced.
While their failure will be viewed as an economic crisis, it offers a unique opportunity to redesign the government mortgage system. Instead of a crazy quilt of special interest regulations, this new non-profit government agency can be designed to accomplish a clear set of goals. Certainly, the primary goal of the new system should be to provide affordable housing by a government guaranteed mortgage market. The new system could have mortgage insurance similar to FDIC. This insurance could be part of the homeowners "monthly payments" – interest, equity, insurance and taxes.
The immediate concern of the homeowner is the size of the monthly payment and how long it has to be paid. The mix of interest, insurance and taxes affects the size of the total payments since insurance and taxes can affect the risk of the loan. Lower risks demand lower rates. Thus the size of the monthly payments can decrease as the security of the loan increases.
Lower house prices greatly reduce the risk of foreclosure and increase the homeowner’s disposable income. Homeowners can use this income to make improvements on their homes that will increase its real value. They can place this extra income in a commercial bank that invests in job creation and the production of goods and services. For years the politicians have promised affordable housing; now that the market is starting to deliver it, they act as if it’s the bubonic plague. The fall in house prices is certainly awful for Freddie and Fannie.
A "write-down" of overvalued mortgages can bring reality to the home equity market. Those homeowners that came late in the game would see their monthly payments shrink. Those that have paid off their equity would see the price of their homes returned to an earlier time. Such a write-down – as much as 60% – was used during the demise of the S&Ls except those mortgages were sold to Freddie and Fannie at full value and the "profits" were pocketed by "investors."
While homeowners do not have immediate control over their tax structure, incentives for taxes that reduce foreclosure and contribute to the real value of the homeowners’ equity should be built into the new system. Often the first sales pitch of a real estate agent is the availability of fire, police, parks, libraries and schools – things paid by taxes. It has been shown that a land value tax can increase the real home equity by improving the homeowner community infrastructure.
A land value tax is based on the value of the land that results from it local infrastructure, but not owner improvements. The land value tax thus encourages homeowners and businesses to make improvements as they fund local infrastructure.
The land value tax has encountered stiff opposition from land speculators, mortgage bankers, and landlords. Since the late 1990s there’s been increasing interest in this tax as a way to solve the problems of "urban sprawl" – destruction of natural areas and parks, increase commuter traffic, air pollution, decrease in the tax base, vacant lots, abandoned buildings, and deterioration of a sense of community. The use of a land value tax in Pittsburgh and Harrisburg, Pennsylvania has dramatically demonstrated that such a tax can revitalize communities.
We’re all familiar with those politicians that blame taxes for all our economic problems. Often, they are the ones responsible for our large national deficit. Amounts taken by taxes are minuscule in comparison to the enormous drain by mortgage speculation. The high price of real estate robs every sector of our economy.