May 09, 2014
A front page Washington Post article fundamentally misrepresented the main impact of the Johnson-Crapo bill that would privatize Fannie Mae and Freddie Mac. The article told readers that the bill:
“would dismantle the companies in a bid to shift the risks of mortgage lending from the taxpayers to the private sector.”
Actually, the government would still be on the hook for 90 percent of the value of privately issued mortgage backed securities (MBS). As a result of the perverse incentives created by the system envisioned under the bill, this would likely mean more risk to the taxpayers rather than less. Private investment banks would stand to profit from securitizing bad mortgages. Unlike the years of the housing bubble, when investors stood to lose 100 percent of what they paid for a MBS, investment banks could tell their customers that in a worst case scenario they would only lose 10 percent of their investment with the government picking up the rest of the tab.
For this reason it is hard to see Johnson-Crapo as a “bid to shift the risks of mortgage lending” to the private sector. The most obvious way to accomplish such a shift would be to simply get the government out of the business.
The most obvious effect of Johnson-Crapo is to shift the profits that Fannie and Freddie are now earning to the financial industry. Presumably the bill’s proponents recognize this fact.
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