Sam Cutler This is a minor revision from August 2013 -------------------------------------------------------------------------------------- Hey, so Ive done some pretty good research on the different options to close Fannie & Freddie for the last three or four days [I think too many use Fannie and Freddie interchangeably with GSEs or the two companies]. Ive spent quite some time searching for an appropriate solution to the dilemma of reforming Housing Finance in the U.S., because İ think it is currently popular. Dont even dare of plagiarizing! Plagiarism--the general use of making the work of people appear to be yours--is a disgusting thing to do. And yet, İ cant secure sufficient funds to keep me going beyond the end of this week and continue to focus on the essentials. Though being held under permanent financial captivity, I am still positive about it. Actually, its not whether you win or lose its how you play the game, I came up with the following proposal: INTRO Having privileges and failing to come into fruition is similar to having stereotypes or a simulation roadmap like the one given here from the Heritage Foundation and failing to examine them. Such elements of the character as [1] having unlimited investment opportunities, [2] carrying out non-regulated activities, [3] holding special interests and privileges, [4] exerting autonomy and critical view, [5] stretching a potential back-up line, [6] being exempt from any type of taxes, [7] maintaining independent resources and [8] being adherent to any sort of tax exemption and exclusion, as well as deduction of costs are all advantages that I wish I personally could possess as my own. And all of which reads to me that financial markets didnt know how to proceed in the first place;) For government-sponsored entities [GSEs] to join privileges for [such as tax advantages, exclusions, exemptions, and deductions] is going to trigger more transactions of mortgage backed securities [MBS] to come in the future. It will give them a feeling of power to relatively exert more control over the financial markets, as its been given to duopolists in connection to the guarantees. İn particular, the determination of the interest rates. Such regulatory privileges in terms of the treatment GSEs received of their fair value most likely cause a dilemma for them well-recorded. Fannie Mae and Freddie Mac’s--government created, but publicly traded--greater effects on their competitors is possibly incurring substantial costs to the taxpayers. GSEs also take on a temporary momentum of their own. After having achieved the purposes for which they are designed to function primarily through a subordinate clause, which would ensure that they can expire once aligned with their congressionally-issued goals, they probably are going to dwell and boost themselves. These goals also apply to specific tasks to improve the affordable housing options for low-income families. Unfortunately, thats not been almost ever-present since even prior to their independence. The usual result of having a poor design is that GSEs end up initiating much of the corresponding legislative and regulatory framework for their own that people vote on their fate. At this point, privatization of Fannie and Freddie perhaps would mean removing their federal charters as well as all their explicit and implicit governmental support; perhaps, it really be not a real privatization but something in between. PROVIDING STABILITY AND LIQUIDITY TO THE MARKETS Fannie and Freddie have attempted to justify their existence by pointing to benefits they may provide for American homeowners, primarily: [1] offering systemic stability and liquidity to the markets; [2] optimizing soundness and safety; [3] boosting consumer protection from higher interest rates and from errors in the residential market; and [4] improving overall services offered to the homeowners. However, these claims have partly been contradicted to a small extent by independent research conducted, and from what Ive observed. First, particularly in the lead-up to the financial crisis, they had financially emerged fragile and had provided only limited soundness and safety, before a whole government pitch-in was required to bail them out [once again after theyd gone through a critical recovery phase in the late 1970s and early 1980s]. Second, while Fannie and Freddie typically do meet their minimal affordable housing goals, such as reducing housing costs for homebuyers as well as addressing the positive externality of homeownership, a number of studies indicate that they hit at crossroads with other federal programs and were not particularly effective, when compared to other financial corporations. Third, in the field of consumer protection, their reputation also took a weak when it became public that they readily bought up suspicious subprime mortgages primarily originated in the U.S, or promoted the trade among their peers. We may expect much as a result of it: RMBS were issued in abundance. Finally, Fannie and Freddie’s highly touted impact on the interest rates amounts to a modest reduction in property sales transactions with the typical borrower. This has even turned out to be a trade-off to the average Americans. THE MISSION OF FANNIE MAE AND FREDDIE MAC Two of the largest GSEs, Federal National Mortgage Association [Fannie Mae or simply Fannie] and Federal Home Loan Mortgage Corporation [Freddie Mac or simply Freddie], do exist mainly for the purpose of establishing a secondary market for mortgages and loans. A secondary market allows mortgage lenders to market their loans, instead of acquiring them to hold them on their books until maturity or full payment. For a mortgage lender there are two primary advantages of selling mortgages, after they have been made: First, selling loans allows financial institutions to match maturity of the securities borrowed short term, primarily in the form of deposits or short-term loans; with the profits earned long term on the debt--so-called interest rate risk. The maturity-matching approach requires that short-term assets be financed by the long-term loans. Second, once institutions are accounted for marketing loans, they probably no longer bear the risk of failure--so-called credit risk. Since 2008 Fannie Mae and Freddie Mac operate under conservatorship of the Federal Housing Finance Agency. Any debt derived from their mortgage market activities is guaranteed, directly or indirectly, by the federal government” [Heritage Foundation]. The federal takeover of them incurred a burden of cost on the federal taxpayers about $180 billion through March 2011, and further lost had been estimated to occur, according to Heritage Foundation calculations. According to the report, Fannie and Freddie just recently recovered from the financial crisis and they are called for investments to improve U.S. competitiveness; not just to rebound from the crisis but also to foster economic growth. STATE-OWNED ENTITY LIQUIDATION OR PRIVATIZATION? But either liquidation or privatization accounts for a bulk of MBS assets--both economically and politically. An alternative is to downsize the GSEs as a way of reducing costs, simply because its the right thing to do. While seeking risk-management responsibilities with OFHEO, or preferably with a preferred equity position, the method of downsizing GSEs is way to go about it until improvements attract suitable investors, such as potential hedge funds. Doing nothing, sometimes, is better than doing something. Thats why Congress will be persuaded to act to resolve this dilemma only when true costs of recapitalization and inaction--in terms of money and lost job opportunities--are made transparent. In the same way, restructuring ought to be extended to the GSEs incentive system, or the whole woven structure of the mortgage finance sector. Losses and/or subsidies from the federal government have rarely been shared with the stakeholders and the shareholders, or losses have not been accompanied by the forceful loan recovery efforts. In most cases, restructuring has merely conveyed some performance aspects. REMOVING MORTGAGE INTEREST RATE SUBSIDY HAS LITTLE IF NOT ANY IMPACT ON THE OVERALL ECONOMY AS WELL HOUSING MORTGAGE VALUES The removal of the subsidy on interest rates has been translated in light of absence of transactions untertaken by Fannie and Freddie, and much attention has been given to the use of IHS Global Insight (GII) Short-Term U.S. Macroeconomic Model--a model that is leading government agencies and Fortune 500 companies employ to produce independent economic forecasts--to study the likely trend effects of a policy change on the U.S. economy, [The Heritage Foundation Leadership for America]. That particular report particularly estimates the likelihood of economic effects associated with recapitalization of Fannie and Freddie that has the following properties & criteria to rely on: The overall impact on the economy; employment; household income and consumption; cost to taxpayers and homeownership. The result of this simulation by the Heritage Foundation indicates that the U.S. economy will be subjected to relatively minimal effects of winding down the GSEs. In numbers, it could push down the overall economy by $9 billion [0.037%] below the baseline levels of real GDP [$15.8 trillion] over the five-year forecast. The difference in real output is almost non existant or minimal. This also accounts for the rest of all above mentioned properties that were scrutinized under simulation. In the same way, removing the subsidy on intetest rates has little if not any impact on housing property value. In sum, the results in this report provide additional evidence that the housing GSEs should be ceased to exist, which is probably as unlike what I thought. İn fact, ceasing the transactions of the GSEs can be painful--a subsidy that has already triggered households to be encumbered with debt-related consumption for the mere purpose of providing such benefits. HEDGING THEIR BETS By exerting control over the interest rates on the secondary market for MBS which has a direct impact on the primary mortgage market, the two companies have repurchased their MBS once issued themselves through activities in the former market. And most of their asset positions on their tattered balance sheet now are extricated. Similarly, taking advantage of the Federal Reserve policy [45] and the federal government agency in issuing warranted debt by the agencies themselves and by the Treasury department, the two companies also fund their mortgage-related asset holdings overwhelmingly through issuance of other debt securities. Over the past decades, the growth rate of MBS issuance by both Fannie and Freddie has been breathtaking. İn fact, one becomes obsessed with the numbers and their meaning, which is why a more equally increasing re-distribution of benefits to margins would really be welcomed. Considering this, the two companies’ mortgage related total assets [MBS as well as debt] settle around a few TRILLIONS of dollars for Fannie and Freddie in order to keep MBS transactions up to the daily limits. Thus in particular, an efficient transmission of the benefits to the low-income homebuyers would mostly be desired, which is already working ONLY at a decent level and which will be through the policyholders. ABSENCE OF PREPAY PENALTIES, WHO SHOULD BEAR THE İNTEREST RATE RISK? Fannie and Freddie are doing a good job by systematically managing and dispersing the interest-rate risk. Commercial banks and savings and loan associations [S&L] are lenders of primary mortgages to the borrowers that feel great relief if having debt provisionally taken out of their books [Policy Analysis; Lawrence]. It is time to extend their reach, Fannie and Freddie might usher in and give value to some cross-subsidy, which runs from those who are less likely to prepay mortgages to those who are more likely to prematurely pay off loans. A negative convexity is the result of it as lenders give out callable loans to the borrowers. İt means that no-prepayment-penalty fees occur when loans are subjected to interest rate fluctuations. The downside of this option for borrowers to call upon callable loans is that an additional risk-premium charge is due, which will be placed on top of the regular interest rate charged and required by the origination clause. If the privatization of Fannie and Freddie is the cure for all ills, in more technical terms, any attempt or thought of at the time when eliminating Fannie and Freddie is probably going to cause them to switch over to non-callable loans in the first place. Non-callable loans are to be endowed with prepayment-penalty fees; the charge of which, given highly volatile market conditions, is likely going to lessen profits for the entire mortgage market. And likely bring to it about instability and unsoundness. Mortgage contracts of this type explicitly stipulate the prepayment option which often costs the borrower less than those mortgage contracts that stipulate no-prepayment-penalty, which displays an absolute advantage to the MBS holder [private investor]. With that benefit to MBS holders enshrined, the usual borrower always takes the risk of possible changes in interest rates when callable loans are redeemed prematurely. A long-life, fixe-rate mortgage transaction, identified with a prepayment-penalty option for borrowers to be granted for that purpose, apparently would instigate an additional risk-bearing pattern of behavior of the MBS holder. Thus, it would always be wise for mortgage banks, or in general, to explicitly state in a mortgage contract in blue prints that the borrower is able to choose between whatever their wishes are in connection to the prepayment terms and conditions; including either options to prepay with penalty or make use of no-prepayment-penalty. But in the latter case then again with higher interest rates charged for lenders to compensate risk and hedge their bets. And thus, Fannie and Freddie will no longer allow themselves buying into fix-rate mortgages with no-prepayment-penalty fees. As an illustration, Mark Zandi, chief economist at Moodys Analytics, has come up with a few estimates. If hes right, under the Senates plan, the typical borrower with a $200,000 mortgage and a 20% down payment could pay about $75 per month more in interest on a 30-year mortgage, or about half a percentage point more. Under the House plan, which would virtually privatize the mortgage market, borrowers on average would pay about $135 more a month, leading to a number of economic effects, (finance.fortune.cnn/tag/freddie-mac/). İn absence of subsidy, the economic effects of eliminating the GSEs in U.S. housing finance would likely benefit the lower-income households, whereas households with relatively higher wealth accumulation would benefit from subsidy. This can mainly be explained by, the latter is more vulnerable to changes in wealth accumulation, not only just because of their relatively keen awareness of professional and ethical responsibilities and their place in the social hierarchy but also accumulation of wealth is related to acquired education and even social stratification itself. In other words, this finding might be expounded by suggesting that people with a higher level of education tend to have better financial resources and behave more generously, but less like risk-averse bargainers. Another theoretical explanation for economic impact would be to find that removing the subsidy may lead to higher inequality of wealth, mainly because of the phenomenon of cross-subsidy as it is described above. Literally, it would reduce housing costs for low-income homebuyers relative to high-income homebuyers: Eventually, the removal of a subsidy does not play an insignificant role in financing home properties for potential homebuyers, especially with low-income status [see articles “policy analysis” and “Heritage Foundation”]. According to policy analysis and cost analysis [Lawrence, 2004], subsidies granted to Fannie and Freddie indirectly spark the consumption of more housing at the higher level of income than at the lower level. Putting it [even] more plainly, at the expense of working families--by those who would have bought anyway--and with the fact that resources are inefficiently utilized. In addition, the privatization would be of modest proportions: I assume that the impact of elimination is going to trigger an increase in interest rates between only 25 and 40 basis points but likely with immediate cost of borrowing always doubling in a year. I assume an immediate and permanent cost of borrowing in the mortgage market. Greener parks for cleaner water supply as well as forest infrastructure enhancement are to be brought about by the privatization efforts: From urban to suburban, various locations in the U.S. merit and need more special attention in the future. However, if the removal of the subsidies true and GSEs had been recapitalized, statewide branching should have been fortified by creating, maintaining and managing large, richly diversified banks across the States that do not contain the vulnerablility to bank runs and portfolio shocks. During the 2008 financial crisis, quite a few local banks in the U.S. went bankruptcy because of the lack of competition and allegedly lower penetration of managed care. Thats why no only changes in subsidies are necessary to eliminate Fannie and Freddie, but a cross-application of elimination seems difficult. Some U.S. public policies are currently in place on a federal level with regard to favorable funding for thrifts and like-minded depository institutions that are directed by FHBS, as well as separate depository charters for thrifts. Consequently, the effectiveness of elemination or reduction of the respective public policies currently in place wont be stressed here, along with the need for more active private policies being enforced. PRIVATIZATION BRINGS ABOUT A MANDOTORY OBLIGATION TO ESTABLISH INSURANCE COVER TO KICK IN IF THERE IS A LOSS OF POWER AND HIGHER INDEBTNESS Helping with creating an independent body to collect insurance premiums into an insurance fund pool from the mortgage industry that kicks in if privatization efforts in the aftermath of rebirth of Fannie and Freddie defaults is the first-best option to solve the dilemma of public and private form of Fannie and Freddie. According to the bill by Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va), as an indication of how much a lender would be considered to contriubte into the fund pool my answer would be at least as much as the borrower is subjected to. A share between the lender and the borrower is sane to do so. BECAUSE OF THEIR TREMENDOUS SIZE AND THEIR LOBBYIST IN WASHINGTON, FANNIE AND FREDDIE ARE TO BIG TO FAIL Before the credit crisis, GSEs funded or guaranteed around half of all American housing finance, with the highest total debt service of around $5 trillion, including $3.4 trillion outstanding MBS. This compares with $10 trillion of government debt at the time of their ‘conservatorship in 2008. Nowhere is this fundamental question of corporate governance more acute than in situations where shareholders and stakeholders overlap. In the early 2000s, Fannie and Freddie were asked by the Bush administration to increase financing for low to moderate income regions with high minority populations; that combined with shareholder calls to improve their returns. As a result, the GSEs used their AAA ratings to invest in, or guarantee higher-risk loans instead. Unfortunately, these loans had little borrower documentation, lower credit scores, and/or higher loan-to-fair-value ratios. FAIR RETURN ON INVESTMENT, PROTECTION OF THE CONSUMERS FROM DUOPOLY PRICING, AND CONVEYING SOCIALLY ATTAINED BENEFITS TO FIRST-TIME HOMEBUYERS ARE CRUCIAL Congress has a long history of attaching upon GSEs to prompt private investments. As the dominant purchasers of the residential mortgages, GSEs have effectively routined the prime residential loans to the homebuyers by the implicit guidelines not rules. Such standardization has spurred a rise in liquidity and the attractiveness of mortgages as investments to a broad array of investors, and, fortunately, social benefits were conferred to the American homebuyers. Private label RMBS were issued by the commercial banks and S&L which are sponsored by the subprime and/or jumbo loans, without the type of guarantee that Fannie or Freddie would give. Subprime loans are not just for people with less than perfect credit, and loans over the conforming loan limits are commonly called jumbo and super-jumbo.” Now, a win-win situation emerges. Because of the charters provided to them as GSEs, Fannie and Freddie have been able to bag the profits greatly from this second line of business. They all win in the end and gain profit out of the primary as well as secondary mortgage market activities. Even investors have been silent seekers if only it comes to wealth creation and to doing business: A casual approach, or business as usual. However, as Fannie and Freddie’s prestige began to emerge ascendant in the lead-up to the financial crisis, troubling positions on their balance sheet of possible losses started to appear. Their mortgage underwriting positions had been too leveraged and had not accounted for the possibility of lower housing prices across the nation, and of turmoils in the U.S. housing and stock markets. IT ALWAYS SEEMS TO BE WISE TO RETURN EVENTUALLY TO A PLACE THAT ONCE KNOWN WELL Fannie Mae and Freddie Mac may buy an outright to hold it in their books in order to sell securitized mortgages to the investors. Initially, their function was to expand the availability of credit to residential mortgage businesses, buying mortgages from commerical banks, S&L, or mortgage banks and holding mortgages for profit. While a secondary market for residential mortgage-backed assets was created and GSEs have insured residential mortgage loans throughout the past decades, the broad secondary market started off in earnest with the chartering of Freddie Mac in 1970, and the decision to allow both GSEs to purchase and securitize conventional mortgages. But further to it, they were themselves involved later in excessive profit-driven MBS activities, partly with Return on Investment (ROI) around 25 percent; it’s respectable but not spectacular. AN ARRAY OF EXTENSION OF PRODUCTS THEY DO BUSINESS WITH AND POLITICAL CONFLICTS ARE LIKELY TO CREATE AN UNREST WHEN PRIVATIZATION IS SET IN MOTION Though they are both quite tightly regulated and under scrutinizing eye, a higher stake of the federal government or the Treasury would ensure that GSEs could be thrown in a tighter loop which, by the way, is unlikely to happen given a privatization voucher. With higher fees charged upon warranted mortgages, and time and restriction in the form of mortgage selection, the MBS activities will no longer cost taxpayers billions of dollars to maintain GSEs. This is mainly after crisis and because the situation is right now what we are expecting it to be: The rebirth of GSEs is now worth taking in profit and loss terms. İt is without saying that the current ROI is highly appreciated among private investors. IF POLICY MAKERS TACKLE THE SIZE AND THE PACE OF RECAPITALIZATION WRONG, WE WILL MORE LIKELY SUFFER A CREDIT CRUNCH Fannie Mae’s preferred and common shares were honored, after the company had reported record earnings of $17.2 billion for 2012, on April 2. Common shares closed higher at 83 cents, at the same time, giving the company a market capitalization of $4.8 billion up from $1.5 billion at the end of 2012 and down from $57.7 billion at the end of 2006 [Stock Market Watch, 2013] according to data compiled by Bloomberg. If the housing market continues to rise this time around and Fannie Mae and Freddie Mac still remain under conservatorship for the next couple of years, taxpayers would come out victorious ahead of a few tens of billions of dollars market worth of Fannie and Freddie, according to the anticipated budget by the White House. As mere opposite view, liquidation of the GCEs is likely going to cause future prospects of profit to be gone. After all, I admonish to tightly cling onto them not only for profits sake, but for making them an instrument to help margins and low- and medium-income homebuyers, particularly during these anticipated periods of relaxation and after contraction due to the recent financial crisis, come out of their shell. PRIVATIZATION WILL PUT FANNIE AND FREDDIE UNDER COMPETITIVE PRESSURE The drain of big enterprises is likely to worsen as Fannie and Freddie face weak competition from the commerical banks and the S&L. That is why it is so urgent to re-think and privatize these two enterprises. İn order to keep the proceeds out of both of their sales and reduce the government backed high-cost debt, which is raised in form of undertakings or guarantees, the public sector needs to be assured and real interest rates nearly fixed in relatives terms. The proceeds could also be used to restore and enhance integrity of the home appraisal processes in overall mortgage finance that Fannie and Freddie have often used to finance their books. In general, either liquidation or privatization has proved easier for small and medium sized GSEs. However, regardless of what size or pace, within couple of years from today, the two entities may well triple their assets on books and double their profits, largely through improved privatization efforts. With Congress still decisive and holding the upper hand over those GSEs, a vigorous development effort can result out of such kind of approach. For example, Claren Road and Perry Capital hold preferred shares of either GSEs. Corker in February of 2012 proposed a bipartisan bill that would ensure the inability of the Treasury to act upon selling its senior preferred shares to the private investors. Co-sponsors include Elizabeth Warren, a Massachusetts Democrat, Mark Warner, a Virginia Democrat, and Senator David Vitter, a Louisiana Republican. COMPETITON AND PRIVATIZATION ARE NOT AN END IN THEMSELVES Regardless of whats been undertaken with respect to Fannie and Freddie, an elaborating social housing program put in place for low- and moderate-income first-time buyers is worth creating in its own fate. The program is a means to improve quality and reduce the cost of financial services offered to potential American homeowners across a broad segment of population. FIRST, PRIVATIZATION MUST BEAR A PROPER SUPERVISION SYMBOL A warning is in order: Experiments with bounteous measures on the GSEs without an adequate supervision may fail. Several poorly managed, undercapitalized investors may instead tend to speculate in the aftermath of privatization, and their possible losses would now weaken the overall mortgage financial market and threaten its business cycle. Thus, the Federal Deposit Insurance Corporation should be part of a theme to enhance better supervision and enforce prudential regulations. By the same token, an ongoing implementation of a market-determined mechanism for determining interest rates is an integral part of a competitive financial system. But to avoid the detrimental effects of higher real interest rates, liberalization of which has to be plugged in with a macroeconomic adjustment program that is going to reduce the federal budget deficit during commencement. SECOND, PRUDENTIAL REGULATION IS WHAT THE RULES DO TO A COMPETITON IN THE MARKET Both a prudential regulation and a supervision system are essential to require Congress to enforce hard budget constraints on the financial actors, to improve the quality of Fannies and Freddies portfolio and strengthen their capital structure, and to reduce their environmental impact on broader public infrastructur, which I call environmental issues vs. negative externalities. Positive externalities from homeownership to neighbors and farmers are mainly advocated issues in the public eye, if not the most; also in light of their undertakings to create onwer-occupied tasks vs. those of a landlord-tenant combination. Positive impacts on owner-occupier families are way highly demanded. At this point, probably it would mean establishing a profit-motivated design that can solve looming problems. İn fact, it may be even effectively incentivized by holding onto traditional values. Thus, a more elaborate policy from these externalities would contribute to the overall idea of creating an atmosphere where first-time homebuyers can pursue their personal goals more closely in connection to property owning. In that respect, programs currently in place, however, favor more housing construction as well as consumption for higher level income people rather than lower level, where tax advantages in the housing market, with all due respect, are likely seen to be ingrown and asymmetrical. In short, Fannie Mae and Freddie Macs structure is quite of this broad-based nature. Lawrence in his housing analysis has suggested that this diversified incentive only constitutes excessive non-lucrative large housing estates and, to some extent be conceived negatively, neurial human capital; and perhaps, its externalities on productivity as well. [see also Edwin S. Mills, “Has the United States Overinvested in Housing?;” Patric H. Hendershott, “Tax Changes and Capital Allocation in the 1980s,” in The Effects of Taxation on Capital Accumulation; and Gervais]. These results can be summarized bluntly: Over the past decades many large housing properties and less rurial, affordable housing estates have been created in the U.S., while there may have emerged a significant moral hazard problem through the lack of competiton that is instrumental in creating monopolistic conditions in the marketplace, and mainly contributing to price advantages to the GSEs [Lawrence]. Besides, a correlated systemic risk occurs when the farmers experience a negative return at the same time (drought, for example). GCEs ARE NOT A BURDEN BUT A POWERFUL FORCE THAT LET BANKS LIFT MORE THAN OTHERWISE AND HELP FACILITATE THE ISSUANCE OF MBS Fannie and Freddie confer an advantage to the U.S. homebuyers as well as to banks. Recall that the two companies dont actually initiate home loans, but instead buy into loans with mortgage lenders which are then packaged as securities and sold to wealthy investors. For years, it helped banks keep the risk on their balance sheet afloat and freed up more money for them to give out loans, and therefore helped them hold down interest rates in an effort to spur innovation and growth. If borrowers default, the companies promise to repay off investor loans thanks to an implicit guarantee they have from the federal government. FOR THE TIME BEING A PRIVATIZATION OF FANNIE AND FREDDIE SHOULD NO LONGER BE BASED ON SUBORDINATED LOANS By 2008, the GSEs held on their balance sheet or guaranteed around $1.6 trillion of these ‘non-prime mortgages [a third of their total exposures], which unsurprisingly accounted for the most part of their losses. Fannie and Freddie had once again superseded private investors and had protracted them further down the credit line. The consequence was an increase in even riskier sub-prime lending, which doubled from a tenth to a fifth of all new American home loans between 2001 and 2005. In addition, in my opinion, any sort of excessive and futile rental subsidy from free informal care to formal care ought to be re-considered and assessed anew. Acquisiton and issuance of, and sale of MBS ought to be kept under appropriate control at all times. Considering this, a slow growth rate of the MBS holdings for either possession or sale would be to make financial markets appear more sound, healthy and safe in a sustainable manner, but implicitly contain the independent variable (casualness), oops! NATIONALIZATION VERSUS PRIVATIZATION In conclusion, generally nationalized companies have monopolies or duopolies since a state ownership is a way of prohibiting them of making personal and improper use of their power, and fobbing their customers off [[normally this applies to things like utilities, communications companies, airlines, etc.]]. Similarly, privatization would have the same effects since it allows the government to exert power or/and control over the GSEs so that the markets would find the equilibrium in case of it. As mere opposite, an attempt of nationalization of Fannie and Freddie would likely drive their values down to almost zero. Similarly, if additional capital cannot be raised by either companies then the case for privatization becomes futile and the shares held internal by each company may have less worth on the one hand. In effect, the motion of a federal takeover daunts the very leveraging of funds that could make both companies more economically sound on the other hand. Thus, either privatization or natinonalization of Fannie and Freddie is a two-edged sword, both are to be considered at certain seasons of the stage. This algorithm works as long as the system is fully controllable by Congress. Sometimes the true measure of wealth can be realized by understanding that it is not how much you have, its how little you need and how much you owe! The reality is that those privileges are there to protect the most primitive rights of the American homeowners. Reference: heritage.org/research/reports/2013/01/a-housing-market-free-of-fannie-mae-freddie-mac#_ftn4 cato.org/publications/policy-analysis/fannie-mae-freddie-mac-future-federal-housing-finance-policy-study-regulatory-privilege-0
Posted on: Sun, 27 Oct 2013 11:22:38 +0000
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