William Poole, who for years was one of the most respected voices in the Federal Reserve as the former head of the St. Louis Federal Reserve Bank, has an op-ed in The New York Times today advocating the end of government-sponsored entities meddling in the housing market:
On Tuesday, the Obama administration plans to hold a conference to address the question of what to do with the two companies [Fannie Mae and Freddie Mac]. Clearly, it would be an inexcusable mistake to reconstitute them as private companies in anything close to their prior form. Some people have suggested recasting them as a single new “Fan-Fred agency” that would continue to securitize and guarantee home mortgages. It’s true that Fannie and Freddie played an important role in developing the market for mortgage-backed securities. But they have completed that work, and they should not be preserved in any form. They should be thanked for their successes and gracefully retired.
Can the home mortgage market stand on its own, without support from federally sponsored mortgage companies? Experience tells us that the answer is an unambiguous yes. When Fannie and Freddie curtailed their operations after the disclosure of accounting irregularities in 2003, there was no effect on mortgage rates. We have seen how the jumbo mortgage market, for loans too large to be eligible for Fannie and Freddie purchases, has long operated efficiently, with rates only slightly above the rates on smaller mortgages. And many other asset markets, like the one for securitized auto loans, have functioned well without federal intermediaries.
If Fannie and Freddie were to continue to operate with the government absorbing all their risk, they would keep a large share of the market. But that system has been terribly expensive for taxpayers. The evidence shows that the private market can originate, securitize and distribute home mortgages efficiently on its own. While it’s true that the private market brought on the financial crisis by creating so many subprime mortgages, Fannie and Freddie did not block that parade; they joined it — indeed, in some respects led it.
Be sure and read the whole thing.