Monday, September 08, 2008

Little Orphan Fannie

Regarding the necessity of taking over floundering Fanny, there is rare agreement from economists on both sides of the political spectrum. Robert Kuttner puts it in context:

Criticism was limited to the right and left. The Wall Street Journal and libertarian think-tanks regularly warned that Fannie was getting too big and too speculative with an implicit government guarantee. A few progressives like your faithful writer objected that FNMA's true purposes were being perverted and the system was being put at risk so that insiders could get very rich.

In virtually none of the coverage of the Bush administration's latest emergency action, did anyone bother to tell the back story. Fannie Mae, nee the Federal National Mortgage Association, (FNMA) began life as a government invention. It was born "nationalized"--and it worked beautifully until it was privatized.

FNMA was part of the New Deal's trinity of housing agencies--the other two being the Home Owners Loan Corporation and the FHA-agencies that Roosevelt created in order to literally create the modern mortgage system. Before the New Deal, there were no long term, self-amortizing mortgages. The loan was due and payable at the end of the term--usually five years--and if you couldn't persuade a bank or savings-and-loan to roll it over, you lost the house. After foreclosures exploded during the Depression, Roosevelt invented a whole new system. FNMA's job was to buy approved mortgages from banks, to replenish their working capital, so that they could make more mortgages. As the biggest buyer, FNMA also maintained standards.

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