Fannie and Freddie Ought To Be Wound Down

Will 30-year fixed-rate mortgages disappear if the federal government doesn’t guarantee them via Fannie Mae and Freddie Mac? Dean Baker cries foul:

This can easily be shown not to be true by the market in jumbo mortgages. These are mortgages that are too large in value to be insured by the GSAs. A large share of these mortgages are 30-year fixed rate mortgages. Also, while it is less common today, prior to the housing bubble banks did hold a substantial share of their mortgages, typically around 10-20 percent. Since the government was not guaranteeing these mortgages, the banks must have felt the guarantee was unnecessary to get them to issue 30-year fixed rate mortgages.

I’d add that most other countries don’t have agencies like Fannie and Freddie, but manage to have robust mortgage markets anyway. (Sometimes a bit too robust.) It’s true, I think, that the traditional 30-year fixed is a bit of a historical artifact in the U.S. that isn’t common elsewhere, but so what? There’s no reason to stay hooked on the 30-year fixed just because it’s been around for a long time. We should be concerned with proper regulation of the mortgage market—down payment requirements, income requirements, interest rate limitations, etc.—not with saving a particular kind of mortgage. Variable-rate mortgages work fine throughout the world with proper regulation but without GSAs like Fannie and Freddie, and they can work fine here.

Fannie and Freddie need to be wound down gradually. There’s no need for a big bang. But they’re relics of an earlier age and we should be willing to get rid of them.