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As Economy Rebounds, Government Still Plays Role In Mortgage Business
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As Economy Rebounds, Government Still Plays Role In Mortgage Business

As Economy Rebounds, Government Still Plays Role In Mortgage Business

As Economy Rebounds, Government Still Plays Role In Mortgage Business
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  • <iframe src="https://www.npr.org/player/embed/395119065/395119066" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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If you've gotten a mortgage recently, you probably got some help from the government. The 2008 takeover of Fannie Mae and Freddie Mac was supposed to be temporary, but it hasn't turned out that way.

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The housing market has recovered in many parts of the country, but the government still owns the mortgage giants Fannie Mae and Freddie Mac. They were taken over in 2008 during the financial crisis. The move by the government was supposed to be temporary, but it didn't turn out that way. Stacey Vanek Smith from our Planet Money team explains why.

STACEY VANEK SMITH, BYLINE: When the government jumped in to save the mortgage market with its $187 billion bailout of Fannie Mae and Freddie Mac, nobody felt great about it. Here's Timothy Geithner, then Treasury Secretary.

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TIMOTHY GEITHNER: We need to wind down Fannie and Freddie and substantially reduce the government's footprint in the housing market.

SMITH: Republican Congressman Scott Garrett.

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CONGRESSMAN SCOTT GARRETT: I think that's, like, goal one - is to get the taxpayers off the hook.

SMITH: And Barney Frank, then chair of the House Financial Services Committee.

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BARNEY FRANK: I think they should be abolished.

SMITH: None of these things has happened. If you've taken out a mortgage recently, chances are it went through Fannie and Freddie. The government helped you get that loan. Guy Cecala publishes Inside Mortgage Finance. I asked him what fraction of new mortgages the government is involved in.

GUY CECALA: It's about 72 percent.

SMITH: Seventy-two percent - that's a lot.

CECALA: It is a lot. It's dropped, but it's still at a historically high level.

SMITH: By dropped, he means that it used to be 90 percent, so 72 percent - that's what passes for progress. Here is what Fannie and Freddie do. If you get a mortgage, you get that loan from a bank. Fannie and Freddie buy up those mortgages from banks and slap a guarantee on them. So if you don't pay your mortgage, Fannie and Freddie will make up the difference. Fannie and Freddie take a fee for doing this, and then they sell these guaranteed mortgages to investors.

Cecala says one reason the government has been reluctant to hand Fannie and Freddie over to the private sector is that a privately-run Fannie and Freddie might only be interested in guaranteeing certain loans, like loans to really rich people or people with practically perfect credit.

CECALA: We'd effectively be saying, OK, less wealthy people, you're not going to necessarily be able to get a mortgage.

SMITH: Or if you could get one, it would be at a much higher interest rate. And higher interest rates are a very quick way to make houses all across America worth less. Adam Levitin is a professor of housing law at Georgetown. He thinks housing prices could drop as much as 20 percent if the government let go of Fannie and Freddie.

ADAM LEVITIN: The problem is that we've built the market. You know, home prices are based right now on an assumption of tremendous government support for the housing market. Socially, politically and economically, withdrawing that entitlement would be disastrous. The housing market has become, really, a market that's too big to fail.

SMITH: What would happen if the government got out of the mortgage business tomorrow?

LEVITIN: We would have great depression - not great recession, great depression.

SMITH: Guy Cecala of Inside Mortgage Finance doesn't think it would be that bad, but he says it would have a big effect. A lot of people have their retirement, their savings, most of their wealth wrapped up in their homes. And Cecala says this is the biggest reason why the government isn't getting out of the mortgage market. Nobody wants to do anything that would cause housing prices to drop. There is a bill in Congress right now to privatize Fannie and Freddie, but Cecala doesn't think it will go anywhere.

CECALA: I've had, you know, discussions with staffers of a number of key congressmen, and they've all said that they've looked at this issue. And once they do, they say, oh, my God, we'd be nuts to take a position on this. Let's avoid it at all cost. There's not a lot of upside to tackling this as a legislative issue.

SMITH: There is an upside to controlling Fannie and Freddie at least for now. They've paid back the $187 billion bailout and the government gets to keep their profits now - an additional $40 billion so far. These have been good days to be in the mortgage business. On the other hand, if things go badly and people start defaulting on their mortgages, U.S. taxpayers will be on the hook. Stacey Vanek Smith, NPR News.

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