“If it wasn’t for Fannie and Freddie, [the mortgage crisis] would have been a small problem,” Wells Fargo CEO Richard Kovacevich told CNBC today. “Fannie and Freddie and other government agencies guaranteed 70 percent of those mortgages.”
He’s right, of course, though Fannie and Freddie’s market penetration when far beyond that. At the time of the housing market collapse, Fannie and Freddie combined owned or secured some 51% of the entire US mortgage market, not just subprime loans.
Kovacevich did say that if the feds want to be in the mortgage market, they should do it through the FHA. I’m not sure that’s a better idea, given that the FHA isn’t doing so hot either:
FHA’s FY 2012 Actuarial Study for its main single family program shows that its capital position has turned negative, by $13.5 billion. That’s a shift of $23 billion in economic value in a single year, and it puts the 78-year-old agency $34.5 billion short of its legal capital requirement.
If it were a private company, it would be shut down.
What I don’t understand is why the government need be involved at all. After all, banks want to make loans. That’s how they make money. By charging you interest in exchange for lending you money. The only people banks aren’t going to loan to are people who they feel don’t have good chance of paying back the loans in a timely manner.
What the government does by getting involved is distort the market so that people who probably shouldn’t get loans get them anyway. And, as we can see from the outcomes, that’s terrible policy.