Drum notes that Freddie Mac & Fannie Mae's traditional role is buying 30-year mortgages from banks that originates them, something it did well for many years. They could return to this role, or they could be phased out for private market to take over that role, as it does for "jumbo mortgages" which are loans that are larger than what the GSEs can purchase.
Unfortunately (at least, in Drum's eyes), instead of going down either of those paths, the conversation is on creating a hybrid role that he and others feel depends too much on regulatory oversight which has proven to be lax in the past.
Drum is in favor of phasing out both, but I'm not so sure that the private market will entirely serve the same function. A benefit that Fannie Mae & Freddie Mac provides is that when banks sell their mortgages to the GSEs, the banks now have money to make the next loan. With low-income homebuyers, would the profit margin be large enough for private market companies to be interested in purchasing those loans?
Fannie Mae and Freddie Mac, in their traditional roles, had guidelines on what type of mortgages they will purchase, which helped keep the lenders honest. Can we say the same for the system that takes place in their absence?
I recall reading that the only reason the 30-year fixed rate loan is even possible is because of the GSEs. Otherwise, every loan will look like an ARM loan, and homeownership will be more expensive.
Drum closes with:
More generally, I think we provide home buyers with too many bennies already, and we'd probably all be better off if we allowed the market to set prices here without the distorting influence of federal supports.
The idea that homebuying and homeownership is subsidized is something I've touched upon before here and here. But I'm not quite ready to give up on the idea of Fanne Mae & Freddie Mac.
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