Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance

Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance

Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance

Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance

Synopsis

The financial collapse of Fannie Mae and Freddie Mac in 2008 led to one of the most sweeping government interventions in private financial markets in history. The bailout has already cost American taxpayers close to $150 billion, and substantially more will be needed. The U. S. economy--and by extension, the global financial system--has a lot riding on Fannie and Freddie. They cannot fail, yet that is precisely what these mortgage giants are guaranteed to do. How can we limit the damage to our economy, and avoid making the same mistakes in the future?



Guaranteed to Fail explains how poorly designed government guarantees for Fannie Mae and Freddie Mac led to the debacle of mortgage finance in the United States, weighs different reform proposals, and provides sensible, practical recommendations. Despite repeated calls for tougher action, Washington has expanded the scope of its guarantees to Fannie and Freddie, fueling more and more housing and mortgages all across the economy--and putting all of us at risk. This book unravels the dizzyingly immense, highly interconnected businesses of Fannie and Freddie. It proposes a unique model of reform that emphasizes public-private partnership, one that can serve as a blueprint for better organizing and managing government-sponsored enterprises like Fannie Mae and Freddie Mac. In doing so, Guaranteed to Fail strikes a cautionary note about excessive government intervention in markets.

Excerpt

The shapers of the American mortgage finance system
hoped to achieve the security of government ownership,
the integrity of local banking and the ingenuity of Wall
Street. Instead they got the ingenuity of government, the
security of local banking and the integrity of Wall Street.

David Frum (columnist, and former speechwriter for
President George W. Bush)
, National Post, July 11, 2008

On September 30, 1999, a New York Times reporter, Steven Holmes, published a piece titled “Fannie Mae Eases Credit to Aid Mortgage Lending.” The crux of the story was that Fannie Mae was lowering its credit standards, which in turn would increase home ownership. Franklin Raines, chief executive officer (CEO) of Fannie Mae at the time, is quoted in the article:

Fannie Mae has expanded home ownership for millions of
families in the 1990’s by reducing down payment require
ments. Yet there remain too many borrowers whose credit
is just a notch below what our underwriting has required
who have been relegated to paying significantly higher
mortgage rates in the so-called subprime market.

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