Zandi: Healing the mortgage ills

Washington is gearing up for its next epic policy debate: what to do about Fannie Mae and Freddie Mac. Fannie and Freddie are the two mortgage behemoths that the federal government created decades ago, and then took over as the financial system unraveled in 2008. What policymakers decide will determine how high mortgage rates go in the future, how easy it will be to obtain a home loan, and whether the popular 30-year fixed-rate mortgage continues to exist. No one wants to return to the situation that existed just before the financial crisis. Fannie and Freddie had evolved into odd combinations of public and private: profit-maximizing, shareholder-owned companies with unique charters and implicit – but never clearly spelled out – federal backing. Each could thus borrow more cheaply than other financial institutions could, and both used that advantage to earn rich profits investing in higher-yielding mortgages. Fannie and Freddie were also allowed to operate with very thin capital cushions to protect them if their investments went bad.