Mortgages in the U.S. are essentially nationalized, with the
government running the show.
Today there are $14 trillion in outstanding residential
mortgages. Of these, 90% are "controlled" by government agencies
including the Federal Housing Administration (FHA), the
Department of Veterans Affairs, Fannie Mae and Freddie Mac...
However, most mortgages are backed through two private
companies known as Government-Sponsored-Enterprises or
GSEs. As you likely know, these companies are owned by the
shareholders, but have the complete financial backing of the U.S.
Even after the housing boom and bust,
Fannie Mae (
Freddie Mac (OTC:
are still alive and kicking. Today, these two GSEs own or
guarantee repayment on roughly half of all mortgages. If you have
a mortgage, chances are that the taxpayers - by way of Fannie or
Freddie - guarantee your mortgage.
We all know from the housing debacle that this means
shareholders of Freddie and Fannie reap the profits while the
taxpayers pay for the losses. Indeed, a recipe for disaster, and
one that screws the U.S. taxpayer.
All of this has led to the recent push for privatizing the
mortgage market by the U.S. Congress and Obama
Earlier this week Obama called for more security for
taxpayers. Obama said that companies should not expect bailouts
for bad decisions. He also advocated for simple and safe mortgage
products like the 30-year fixed rate mortgage should be
Giving a speech in Arizona, the President said "First, private
capital should take a bigger role in the mortgage market. I know
that sounds confusing to those who call me a socialist -- I saw
some posters when I came in -- but I actually believe in the free
market... Private lending should be the backbone of the housing
The question is whether privatization can work?
Look no further than Europe for the answer.
That's because Europe provides compelling evidence that
private markets can provide the necessary supply of credit to
sustain active housing markets. That's because every European
country has a good private mortgage markets without government
This private approach seems to be working well. For evidence,
look no further than extremely low delinquency and foreclosure.
European lenders, borrowers and taxpayers all recognize that high
underwriting standards prevent the need for government bailouts
and mortgage guarantees.
The U.S. can and will create a sound and vigorous private
mortgage market. But no private market can compete with the
government-guaranteed and subsidized markets of today.
So, how do we get from here to there?
First, the government should lower the maximum amount of a
mortgage loan that Fannie or Freddie can hold or securitize by a
fixed amount say $75,000. As its loan size limits decline, so
will the Fannie and Freddie's market share. Eventually, their
share will reach zero and the market will be privatized. With a
government exit plan announced in advance, private lenders have
time to expand their lending activities.
As a result, borrowers will likely pay a slightly higher
mortgage rate. Typical borrowers could pay an additional 0.5% in
mortgage interest. That would translate into an extra $75 - $135
per month for the average $200,000 home, according various
proposals in Congress.
However, a broader menu of choices and increased competition
could offset the increase in extra interest payments.
Many European countries offer fixed and adjustable rates, with
and without prepayment penalties, alternative amortization
periods and so on. There's no reason we couldn't also have a
wider variety of choices. And the 30-year, fixed-rate mortgage
could remain a favorite of U.S. lenders and borrowers.
At Wyatt Investment Research, we believe that there should be
a true "free market" for mortgages. And this means winding down
Fannie Mae and Freddie Mac.
Allowing private companies to fill the void left by the GSEs
may result in slightly higher mortgage rates for the average
homeowner. But for the American taxpayer and health of our
economy, getting the government out of the mortgage business
would be best for everyone.
Tell me your thoughts on Fannie and Freddie, and President
Obama's plans to exit the mortgage business. Please send me
an email at
with your views and ideas - I would love to hear from you.