Post-Mortgage Meltdown, Where Do We Go Now? As finance experts rethink federal housing policy and whether troubled mortgage giants Fannie Mae and Freddie are worth keeping, some say the benefits of homeownership for many people just aren't what they used to be.
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Post-Mortgage Meltdown, Where Do We Go Now?

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Post-Mortgage Meltdown, Where Do We Go Now?

Post-Mortgage Meltdown, Where Do We Go Now?

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With the financial crisis and near-collapse of Fannie Mae and Freddie Mac, policy leaders are also rethinking the government's role in all of this.

Right now, Fannie and Freddie buy, bundle and stamp a government guarantee on mortgages. Then they sell them to investors. It keeps the banks happy because it keeps capital flowing. It keeps us, the consumers, happy because it makes low fixed-rate mortgages possible.

But this week, Treasury Secretary Timothy Geithner huddled with industry types to figure out how to end the $150 billion bailout of the two firms.

Secretary TIMOTHY GEITHNER (Treasury Department): Fixing this system is one of the most consequential, and one of the most complicated, economic policy problems we face as a nation. And I think it's worth stepping back and asking the basic questions: What went wrong over the past few years? And what are the most important flaws, problems in the system we have to fix?

CORNISH: So I got in touch with someone who was in Geithner's audience, Raj Date. He runs a financial policy think tank called the Cambridge Winter Center. Date says policymakers are at a bit of a crossroads.

Mr. RAJ DATE (Chairman and Executive Director, Cambridge Winter Center): On the one hand, it's very hard to contest the fact that Fannie and Freddie, for all that they do, kind of did the main job wrong.

That is to say, that they were supposed to be involved in supporting credit across the U.S. housing system. And what we ended up with is, instead of credit being priced rationally, we ended up with a $6 or $7 trillion bubble in housing values. They'd made astonishing mistakes.

CORNISH: What are those mistakes?

Mr. DATE: The mistakes, for the most part, can be boiled down to the same kind of mistakes that most of the banks in the country made and certainly, all of Wall Street made. And that mistake is, as housing values got increasingly out of control, as normal people everywhere in the country realized that housing prices seemed to be growing straight into the stratosphere, instead of becoming more conservative about lending against those ridiculously high values, Fannie and Freddie just continued to make the same kind of loans and indeed, made more aggressive loans during that period of 2005, 2006, 2007. And it has all come back to haunt them.

CORNISH: Have they changed the way they do business?

Mr. DATE: Well, they have pulled back dramatically, in terms of the level of aggressiveness that they used to have in credit underwriting. But the fact of the matter is that on average and over time, Fannie and Freddie represent an economic subsidy from the public at large, to middle- and upper-middle-income homeowners.

CORNISH: You call this a subsidy. I mean, effectively Fannie Mae and Freddie Mac, in a way, make our current mortgage market possible, for better or worse. So realistically, what would happen if they went away?

Mr. DATE: Without Fannie and Freddie, you'd really have a two-part market. You'd have so-called portfolio lenders. So banks and thrifts and the like who make mortgages and then withhold it on their own balance sheets, and then you would have the so-called private label, mortgage-backed securities market -which is basically people originating loans, selling them to Wall Street, and then Wall Street syndicating those loans, selling bonds backed by those loans all over the world.

CORNISH: What are you seeing in the policy discussions, though, about what might actually happen? Because even folks who say let's do away with Fannie and Freddie don't seem to realistically be talking about doing it overnight.

Mr. DATE: I don't think there's anyone reasonable - and even mostly unreasonable people, frankly, are not talking about unplugging the GSEs overnight. I mean, together with the FHA, Fannie and Freddie are doing something like 95 percent of the mortgages in the country today.

CORNISH: In a way, they are the mortgage market right now.

Mr. DATE: Yeah. So you would see - I mean, if you think that, you know, the fall of '08 was calamitous, believe me, you haven't seen anything yet if you would just somehow turn off the lights at Fannie and Freddie today.

That said, I think the policymakers are trying to be thoughtful about what the right long-term answer is for housing finance more broadly, and that involves revisiting some issues that have been treated as sort of untouchable for quite some time.

The world we live in today is not quite the world that existed in 1950. The nature of households, and the rate at which they dissolve and re-form, the nature of work and its transient nature across geographies, are all things that suggest that maybe, just possibly, the middle-class American shouldn't stake themselves to a - illiquid, very large, concentrated, leveraged asset - that is to say, a house.

CORNISH: That's Raj Date, executive director of the Cambridge Winter Center. He joined me from our studios in New York.

Raj, thank you so much.

Mr. DATE: Thank you for having me.

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