Mortgage Industry Trends

I think at some point, the Wall Street Journal's editorial page looses credibility- at least for me- because of the constant series of columns and essays that are so one sided in their antipathy of Fannie and Freddie Mae.

Peter Wallison, a fellow with American Enterprise Institue, certainly is no weak thinker- and he does a great job explaining the difference in risks that Fannie Mae and Freddie Mac face when they buy and hold or sell mortgages.

However, there are weaknesses in his argument. First, Mr. Wallison suggests Fannie and Freddie face an interest rate risk in buying mortgages with borrowed money. If those mortgages refinance, somehow, Fannie and Freddie are going to buy new mortgages- since they've been paid back on the refinanced ones- that pay a lower interest rate than the money they borrowed.

Franklin Rains probably belongs in jail for what he did while working with Fannie Mae, but I seriously doubt he never took a high school math class and would ever do something that stupid. If the mortgages refinance, I would think Fannie would either pay back the short term money and not buy any more mortgages or perhaps they would re-negotiate the rate they are paying, since if the rate to consumers is down, then certainly Fannie/Freddie can borrow even cheaper money.

That, and I think Fannie and Freddie hedge their interest rate risks- and I believe interest rate risks are some of the easier risks to manage.

The second weakness in his argument is the same theme that gets marched out by any opponent of the GSE's- that somehow, the Federal Government will have to bail out Fannie and Freddie.

But, what would prompt that kind of massive collapse that suddenly thousands/millions of people stop paying their mortgages, leaving Fannie and Freddie exposed and asking the treasury for money?

I suspect that if Fannie and Freddie needed to be bailed out, there would be some major financial disruption that would need a goverment bail out- and Fannie and Freddie might be the mechanism to help the economy recover.