Reform Fannie!

Larry Summers says that mortgage giants Fannie and Freddie are feeding off the public trough. He has a good point: some changes are needed.

Fannie and Freddie buy up mortgages, pool them, and issue securities that pay in line with the mortgages. The implicit backing of the Fed is critical to them.  Banks and others buy almost all the “Agency” bonds they want. This keeps the mortgage rates low.

Without the government’s approval, Fannie and Freddie are just more players in the financial markets. Most mortgage rates would rise. And that wouldn’t be good for anyone.

But there’s a catch. If the agencies mess up, we’re on the hook. Summers therefore thinks that dividends should be suspended and other shareholder perks should go away. Maybe that’s a little draconian. But why not treat them like any other regulated monopoly? Monitor their returns, and evaluate their business practices. Limit them, like we do utilities. But also guarantee a return.

No question, things have to change. But destroying shareholder rights is not where we want to go.

Douglas R. Tengdin, CFA
Chief Investment Officer
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