The problems at Fannie/Freddie are not caused by government regulation. Indeed, without government regulation, their problems would have been much, much worse. Even their sub-prime loans are "good" loans for the most part, their federal charters prohibited them from issuing the sorts of loans that got folks like Countrywide into trouble. Rather, their problems are because of a) the economy going sour and lots of people losing their jobs and thus their homes, and b) the housing market going sour and thus they can't resale those homes to make up their losses.
By law, Fannie/Freddie are exposed only to 80% of the equity position on a home. The problem is that housing prices have declined by more than 20% -- thus wiping out the 20% of equity that they could make up by foreclosing on the home and selling it to pay off the mortgage debt. There's nothing that Fannie/Freddie can do about that. A 20% drop in housing prices is not something they have control over, and indeed is one of the biggest drops to happen in a long, long time, at least on a nationwide scale (there was a similar drop in the Oil Patch when the Oil Boom of the late 70's turned into the Oil Bust of the late 80's, but that was restricted to a relatively small geographical area).
So for those who say "they should just be allowed to go bust because it's their own fault", err, no, it's not their own fault -- thanks to government regulation, they're not exposed to the sort of toxic sub-prime loans that took out Countrywide, Indy Mac, and others. The problem is that the *prime* (and "near-prime") markets are going sour too, due to hard economic times and declining housing values. If we wipe out all liquidity in the mortgage market by folding Fannie and Freddie, we end up back in the situation of 1932 -- no money in the economy, no way to buy homes, people living on the streets or in their cars or in "Hooverville" tent cities... we simply need the liquidity these guys provide, and while they should certainly be well-regulated (and I applaud the new regulations announced today that make explicit what their charters already laid out), the answer to their problems is not, and cannot, be to "fold them"... they're as necessary today as when FDR created Fannie Mae back in 1937.
-- Badtux the Liquidity Penguin
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