The transportation special session had barely ended when the troubles of Fannie Mae and Freddie Mac began to dominate MSM reporting (oddly enough, bloggers have been largely quiet about it). I mention that juxtaposition because it enabled a few things to come into focus and stark clarity, leading to one ominous, painful, yet inevitable conclusion: we must let these mortgage giants fail. That’s right: fail - as in declare bankruptcy, fall into receivership, have the assets unloaded, etc.
If one looks at several issues we face here in Virginia and elsewhere (traffic, environment, land-use, the ”popped” real estate bubble, inflation, etc.), one finds that much of it is driven by settlement patterns that Jim Bacon has been skewering for years (inflation is the obvious exception, I’ll get to that one later). Oddly enough, Bacon et al seem to miss the biggest factor in leading to spread-too-thin settlements and all the problems they cause - government-driven, artificial inflation in the demand for property, and the two biggest culprits are Fannie Mae and Freddie Mac.
Fannie Mae began in 1938 as the Federal National Mortgage Association a New Deal government agency set up to provide loans to banks that they themselves could loan out to homeowners (David Fum, National Post). Since these were government loans created from a policy deliberately designed to make homes “affordable,” the banks treated it like the free money it really was, and loaned it out like they were supposed to do. Thus did the government begin artificially inflating property demand (to hear FDR fans tell it, the FNMA was just part of the great New Deal vision that rescued America from the Depression; more and more economists now understand that the rescue can be best attributed to World War II).
For thirty years, FNMA kept property demand artificially high (which likely had a lot to do with the first suburban wave of the post-World War II era), but by the 1960s, the program was doing its job so well that it was becoming a budgetary eyesore. So the Johnson Administration decided to “privatize” it.
Why do I put it in quotes? Because Johnson’s motives were hardly pure (Frum):
In 1968, the Johnson administration decided to privatize Fannie — not for any free-market reason, but because the federal government’s debt was rising fast, and the administration realized it could make the government’s accounts look better by moving Fannie Mae’s obligations off the books.
In other words, LBJ had no problem with the government continuing to underwrite the mortgage industry; he just didn’t want the accountants to notice. So instead, he and the Congress of the time (Democrat-dominated, although I doubt the pre-Reagan GOP would have done much better) came up with a half-hearted scheme that moved FNMA cost off the government books but still gave it all the perks of a government agency (no real regulatory oversight, White House appointments to the the board of directors, and - here’s the kicker - Fannie Mae never had to pay taxes). Making matters worse, the Congress and LBJ created a second such monster (the Federal Home Loan and Mortgage Loan Corporation, a.k.a. Freddie Mac) as “competition” for the new “private” Fannie Mae.
So now, there were two companies, both ostensibly private but with obvious government favors, government ties, and the implied government backing that came with them, artificially driving up property demand for forty years.
Until about ten years ago, that meant suburban stretched farther and farther out. Then the campaign against “sprawl” went national. Spurred largely by liberals at the national level and a politicalhodgepodge at the local level, the movement focused not on the demand for developed property, but the supply. The result was a slew of zoning regulations, purchase of development rights programs, proffer demands - and, inevitably, a steep upward climb in home prices as demand lapped supply.
The final nail in the coffin came in the mortgage rush of the early 21st century. We’ve all heard about folks signing up for mortgages they couldn’t afford, and lenders who ignored economic reality and let them sign. How much attention, however, has been given to the government-sponsored corporations who continued to make it far easier and more profitable for lenders than any free-market would allow? Even when Fannie Mae was caught inflating its own profits by $6 billion (roughly four times the size of Enron’s transgression), not a thought went to what this meant for the housing market.
Well, supposedly, we all know better now - except that no one is considering the one option that will ensure these mistakes are never repeated: letting these two behemoths fail.
For starters, the collapse of Fannie Mae and Freddie Mac will put a swift end to the nonsense of ”government-sponsored enterprises” (yes, that’s their name). An organization can be a private firm or a government agency, but not both.
More importantly, all of the housing-based issues that we are facing today (everything I listed above except inflation), wold be consigned to history, because the demand for property will finally be restored to its natural level. On the financial front, that removes the danger of future massive housingcorrections like the one we’ve seen recently - a correction that has placed so much pressure on the Federal Reserve to keep interest rates low that the American economy is almost entirely disarmed from fighting inflation (unless Congress is willing to reduce overall demand pressure by cutting spending - yeah, I know, they’ll start with the Flying Pork Squad). On the “quality of life” front, it means the inflated property demand that led to “sprawl” in the first place would vanish.
Now, I don’t expect our political leadership to have the courage to let Fannie Mae and Freddie Mac fall, especially not in an election year. If these companies must survive, then they must become companies, forced to act like any other private firm with the same risks, obligations, costs, etc. If the free market has a genuine place for Fannie Mae and Freddie Mac (and it probably does, but not to the tune of $5.3 trillion in mortgage debt holdings), then let them find and operate in that place.
The important thing is - get the government out of the real estate business, once and for all.
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Mark Warner, On the Blogosphere, Taxes, U.S. politics, Virginia politics | 
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