Changing Freddie Mac will not fix our housing problemsFebruary 1, 2012: 9:35 AM ET
Freddie Mac may have blocked millions of homeowners from refinancing their mortgages, but lowering interest payments isn't going to resolve the woes of the housing market.
On Monday, National Public Radio and Pro Publica highlighted a financial conflict of interest at Freddie. Reporters found that the taxpayer-owner company invested in securities that gain when homeowners are locked in high-interest mortgages. Freddie, of course, is supposed make it easier for people to get housing loans. Instead of reducing investments that pay off when homeowners can't refinance (as it was ordered to do as part of the agreement of its government bailout), Freddie beefed up on such securities.
The U.S. Treasury Department has announced it was investigating the report, and several lawmakers and prominent economists have urged Congress to correct the conflict-of-interest problem.
But before we get carried away with pitchforks, it's important to look at the root of the outrage. It's certainly well deserved. But it has more to do with Freddie's violation of the public's trust than all the missed economic benefits from a refinancing boom.
Freddie has been on shaky footing with the public for a while now. In 2008, the U.S. government seized Freddie and its older and larger cousin, Fannie Mae, after both suffered huge losses following collapse of the housing market. The rescue of both companies (which have been blamed for contributing to the housing meltdown) has cost taxpayers hundreds of billions of dollars. It is expected to be the most expensive rescue effort by the federal government during the 2008 and 2009 financial crisis.
As Pro Publica and NPR point out, Freddie's CEO Charles Haldeman Jr., recently told Congress that his company is "helping financially strapped families reduce their mortgage costs through refinancing their mortgages."
A break on that promise – intended or unintended – is a huge betrayal to taxpayers who rescued the companies from the financial abyss. Indeed, there are no excuses, but Freddie's apparent conflict of interest problem is perhaps inevitable, writes Anthony Sanders, finance professor at George Mason University. Fannie, Freddie and its regulator, the Federal Housing Finance Agency, have dual mandates. At one end, Fannie and Freddie are tasked to bring down borrowing costs. At the other, FHFA is responsible for protecting taxpayers from losses at both companies.
Nevertheless, fixing Freddie won't necessarily fix America's housing problems. Even if the federal government encourages more refinancing (which President Obama continued to propose in his State of the Union address last week), it won't really improve the troubled housing market or even the broader economy, according to a Congressional Budget Office report released in September 2011.
A large-scale mortgage refinancing program could spur refinancing of 2.9 million mortgages totaling $428 billion, according to the report. Efforts could also prevent 111,000 defaults that would otherwise occur. What's more, individual borrowers could see $7.4 billion in savings from lower mortgage payments in the first year.
Ideally, households would spend the extra savings on clothes, appliances and other things to help boost the economy. But the impact is likely smaller because households don't usually spend all their savings. And besides, many economists believe a bigger help for the economy would be for lenders to reduce the principal rather than the interest rate on home loans.
So while Freddie's wrongs may have been exposed, a fix won't necessarily make the economy better off.