http://voices.washingtonpost.com/ezr...nie_and_f.html
The right way to think about Fannie Mae and Freddie Mac is to think about the widespread availability -- at least before the crisis -- of 30-year, fixed-rate mortgages with no prepayment penalty. That is not a financial product that flourishes in the state of nature, and for obvious reasons. If you're a bank, why do you want those mortgages? If interest rates go down, people refinance and pay the loan back early. If they go up, you might be losing money on the loan. It's heads they win, tails you lose.
If you've got one of those mortgages, though, you might have Fannie Mae and Freddie Mac to thank. The mortgage giants, slightly confusingly, do not sell mortgages.
They buy them from the banks that sell them. About 90 percent of them, to be precise. They do that to make mortgages -- and thus home ownership -- cheaper. That's fine. If the country wants to encourage home ownership as a policy, subsidizing banks so they can offer better mortgage terms is a sensible way to do it.
The problem is that Fannie and Freddie are not a direct and simple subsidy for the banks. They are private companies with a government charter. Rather than using taxpayer dollars to subsidize mortgages, they were borrowing money very cheaply because their quasi-governmental status assured the market that there'd be a taxpayer bailout in the case of any sort of collapse.
That is to say, their business model relied on markets ignoring the risk of their activities.
And then, because they were private companies with shareholders to please, they also got into slicing and dicing mortgage packages to make money like an investment bank rather than a housing policy. In theory this should've worried the markets where they borrowed their money, but again, the government backstop saved them. Forget too-big-to-fail. This was not-allowed-to-fail.
So, of course, they failed. As Raj Date of the Cambridge Winter Center put it to me, "anytime the debt markets aren't paying attention to your risk profile, you're doomed."
Their failure was not, as some would have it, the cause of the mortgage crisis or even close
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