Market Overview

Fannie & Freddie: Complain or Commend?


conservatorship1 Fannie & Freddie: Complain or Commend?Word broke recently of Fannie Mae’s first quarter results.  The verdict? An $13.1 billion loss. As a result, Fannie is asking the federal government for $8.4 billion in assistance, tapping into its currently unlimited line of credit.  The announcement comes less than a week after smaller mortgage finance company Freddie Mac, said it would need $10.6 billion in government funds after losing $8 billion in the first quarter. Last year, when Tim Geithner took Fannie Mae and Freddie Mac under conservatorship, this clearly could not have been what he had in mind.  And while Geithner and the current administration try to figure out a way to right the ship, both in the short and long term, patience amongst the taxpaying public is running out.  Some people are calling for a new solution.  Some say scrap it and start over.  Some say revamp the system with major overhauls.  Some say keep it as is and let it work itself out.  Some complain about the fact that the executives in charge of overseeing Fannie and Freddie are being paid $10M in salary and bonuses. But is that the real crime here?

Including this most recent request, Fannie Mae will have received more than $84.6 billion from the government, and the firm said it saw no end in sight to federal assistance. Republicans like Alabama Senator Shelby have blamed the agencies, and by extension the current administration, for the collapse of the economy. Yet, Fannie and Freddie’s mission is to make housing affordable for Americans. Solely blaming them for carrying out their mission is hardly fair, nor is it a solution to the problem.  While politicians wag their tongues, people continue to lose their homes, and these two agencies continue to lose money.  We can sit here and blame them, or the banks who made loans they knew they wouldn’t keep on their balance sheets, or mortgage brokers who rattled off commission after commission telling customers to falsify information on their applications, or homeowners themselves for living beyond their means and not saving for the future.  None of that will solve the problem.

Ironically, those who are now running the agencies are the only ones actually attempting to solve the problem.  Yet, we want to blame them for inheriting such a catastrophic mess, and then tell them what they should be paid for fixing our collective problem.  Similarly to a President who inherits a problem from a former administration (Nixon with Vietnam and Obama with financial reform and the War on Terror both come to mind), it is not the fallout from an inherited problem that we should judge them for, but the decisions they make moving forward regarding how to address and solve those problems.

We live in a capitalistic society.  If we want someone to do a job, we need to incentivize them to do it.  If you had a big pile of shit you wanted to remove from your front yard as soon as possible, would you tell your gardener you’ll give him a bonus if he does it quickly and efficiently, or would you yell at him simply because the pile of shit exists in the first place, and then complain that he is making too much money?


Posted-In: Alabama fannie mae financial reformNews Rumors Economics Personal Finance General


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