The retired chairman and CEO of Wells Fargo and the former chairman of the FDIC are making no more bones about it: the say that Fannie Mae and Freddie Mac caused the housing crisis and that the two now-federal entities have got to go. Richard M. Kovacevich, former CEO of Wells Fargo, and William M. Isaac, former FDIC chairman and current global head of financial institutions at FTI consulting, revealed their plan for unwinding the GSEs in a report published by CNNMoney. The two criticized Washington politicians for being “bereft of ideas for turning things around” and stated outright that “without these government guarantees [from Fannie, Freddie and other government agencies] the subprime bubble and resulting financial crisis would never have happened.” They also stated that bank regulators and industry experts alike had warned congress “for decades” about the GSE’s risky lending behaviors. Then, they proposed an “orderly…easy” solution, which we have summarized below:
- Sell off the GSEs’ existing portfolios at a rate of $75 billion a year until there are none left
- Reduce the size limit on new mortgages guaranteed by Fannie and Freddie by $100,000 a year so that they are “out of the guarantee business within six years”
- Use the Federal Housing Authority (FHA) in a transparent manner to handle all low-income and minority housing aid
The two then tackled a variety of potential objections to their plan, pointing out that countries with private mortgage markets have only about 2 percent fewer homeowners than the U.S. and that “a tax-deductible $40 or so extra per month” paid by homeowners on private mortgages moving forward would keep all Americans from being “on the hook” for the GSE’s multi-billion-dollar and ongoing bailouts.
Do you think that this proposal for unwinding Fannie and Freddie is a good one? Should the GSEs be unwound at all?
Thank you for reading the Bryan Ellis Real Estate Letter!
Your comments and questions are welcomed below.