August 08, 2014
It’s great that the folks at the Washington Post are capable of mind reading. If we just looked at the substance of the Johnson-Crapo bill for replacing Fannie Mae and Freddie Mac by a system in which private companies would be able to issue mortgage backed securities that carried a government guarantee, we might think that the motive was to increase the profits of the financial industry. After all, the industry would be able to earn tens of billions in additional profits each year by getting this business.
However the Post told readers:
“To avoid a repeat of the bailout, the Obama administration is pushing to dismantle Fannie and Freddie and shift the risks of mortgage lending away from taxpayers to the private sector.”
Since the bill doesn’t actually avoid a repeat of the bailout, most readers would probably not realize that this is the motive of the Obama administration in privatizing Fannie and Freddie. Under the Johnson-Crapo bill, the government would be on the hook for 90 percent of the face value of mortgage backed securities (MBS). As was the case in the housing bubble years, private issuers would have incentive to issue MBS of dubious quality, since they make money on the issuance. The big difference between the Johnson-Crapo system and the one in place during the bubble years is that the issuers would be able to tell buyers that the government is covering 90 percent of their investment. In the bubble years, investors understood that if the MBS went bad they could in principle lose their whole investment.
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