What if the federal government nationalized the mortgage industry and became the sole originator, servicer, guarantor and holder of all home loans across the country? You know, sort of a home-buyer’s single lending system.
But an investigation into the deficiencies of our current mortgage system – one that is partially nationalized and partially privatized – warrants a closer and more sympathetic look. So does an analysis of how the government already succeeds in addressing problems related to other areas of our national economy.
Fannie Mae and Freddie Mac Were Nationalized
Consider that the federal government’s involvement in the mortgage business dates back decades. The Federal National Mortgage Association, nicknamed Fannie Mae, was created in 1938 as part of President Franklin Roosevelt’s New Deal to halt the collapse of the national housing market in the wake of the Great Depression.
Fannie Mae’s job was to provide banks with financing that could reinvigorate the market and raise the level of home ownership in America. Fannie Mae’s ability to borrow money at low interest rates because of its government sponsorship allowed banks to do the same for their customers. And its profits came from the difference between the interest rates on money it borrowed – usually from foreign investors – vs. that of the monies it lent to the banks.
For 30 years, Fannie Mae operated as a sort of national savings and loan, helping to provide affordable mortgages to millions of citizens. In the decades after World War II, a majority of Americans became homeowners.
But in 1968, President Lyndon Johnson privatized Fannie Mae. And in 1970, Freddie Mac – the Federal Home Loan Mortgage Corporation – was created.
The two entities operated as GSEs – government sponsored enterprises. They still had public backing, but they both issued stock and paid dividends and capital gains to their investors.
Unlike private corporations, they were exempt from taxation and inoculated against meaningful government oversight. This hybrid dynamic allowed them to metastasize into veritable mortgage giants, ultimately controlling a huge slice of the secondary mortgage market.
But much like the country’s private lenders during the first several years of the present century, Fannie Mae and Freddie Mac’s drive to increase profits helped create the housing bubble (thanks to lowered underwriting standards, approvals for subprime borrowers and the bundling of loans into mortgage-backed securities). When the bubble burst, the country plunged into the Great Recession.
So in 2008, both GSEs were taken over once again by the federal government. They now function as part of the Federal Housing Finance Agency (FHFA).
Don’t Badly Behaving Banks Deserve a Socialized Mortgage System?
Because the federal government has already reclaimed ownership of the former quasi-government institutions, and because the large national banks have revealed their blatant fiscal irresponsibility and poor customer service in their handling of the nation’s private mortgage system, the question is: why not return to the old New Deal arrangement that made home ownership simple, affordable and abundant?
Well, here are two objections:
1 Taking over all private mortgage lending is merely another step on the path to socialism.
2. The federal government is incapable of performing functions better suited to the private sector.
In regards to 1: One can argue that the private mortgage lending system is already “socialized,” only with the risks being subsidized by the taxpayer and the rewards accruing to the banks. For instead of allowing the institutions that made risky loans and failed in their fiduciary responsibilities to go under as part of capitalism’s “creative destruction,” the bad actors were rescued with government funds and rewarded with taxpayer bailouts – socialism for the wealthy.
In regards to 2: Let’s take a look at what the federal government has done in the area of student loans over the past few years, to see if a workable model exists that can be applied to the mortgage industry.
In 2010, President Obama signed the Student Aid and Fiscal Responsibility Act (SAFRA), which made the federal government the sole originator of federally backed student loans, ending decades of government subsidies to private-sector lenders for making government-guaranteed college loans.
The legislation increased the percentage of direct loans made by the U.S. Department of Education from about 20 percent in 2006, to 100 percent today. And it is estimated that the federal government will save over $60 billion over ten years since its cost of funds is lower than that of the banks it is replacing, and it no longer will have to pay them taxpayer supplied subsidies for providing the money they heretofore lent to student borrowers.
As of today, the government still contracts outside companies to service its college loans, but it has taken the banks’ profits out of the system, with some of the savings going to beef up the Pell Grant program that makes college aid available to needy students.
Does it work? Any time you cut out the middle man, you save money. Is the 100-percent nationalized, direct student loan system better than what it replaced?
That begs the question of whether the former private/public system worked well in the first place – a consideration that will meet with different responses depending upon who is asked.
But it is worth noting that when the credit crisis of the past several years caused private-sector lenders to begin backing away from the student loan market, the government already found itself having to step in to fill the void and the percentage of direct loans grew considerably during the recent economic downturn.
In a sense, SAFRA merely legitimized a growing trend: since 2008, the government has been providing most of the capital that private-sector lenders used to make their student loans, anyway.
As private credit dried up, more colleges began switching from bank programs to the direct program – a transformation that today is essentially complete. Finally, although private student loans still exist, they are generally more expensive and offer borrowers a much smaller range of repayment options than do government direct loans.
Can Socialized Mortgage System Work?
Can this sort of system work for home mortgages? Free market enthusiasts will deny that it can, just as they deny that a national government can construct a workable single-payer system for healthcare. (Um, that claim is disputed by the number of western, democratic countries that already have such effective systems in place – Canada, France, England, Germany, etc.)
The fact is, there is no reason to believe that a completely privatized mortgage system, nor any sort of public/private hybrid, has, or can, work any better than a government-run system. Clearly, the status quo has been disastrous on a national scale, and without fundamental change it is likely to wreak economic havoc again.
It is often said that the definition of insanity is doing the same thing over and over again but expecting different results. Perhaps a return to sanity, in the form of a system that worked well for decades, is just what the country now needs.
No more exotic loan packages tilted towards lenders’ profit margins. No more slicing and dicing mortgages into securitized bundles. Just plain vanilla mortgages with stable, low rates and understandable repayment terms.
What a concept.
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].