You’d think that we’d have learned are lesson already, that Fannie Mae (FNM) and Freddie Mac (FRE) turned out to be total disasters.The idea of promoting homeownership via for-profit entities with public backing was a huge mistake.
At this point, the goal should be to minimize, not expand their role in the economy and housing market.
Perhaps one day the companies could be wound down completely.
But the government is insistent on taking them in the other direction. The two entities will play a large part in Obama’s much-criticised mortgage modification (the homeowner bailout) plan. And now comes word that they’ll be asked to provide funding for so-called mortgage banks — small mortgage lenders that compete against larger banks, but which don’t have a deposit base.
WSJ: Demand for mortgages is surging as low interest rates prompt millions of Americans to refinance. New U.S. first-lien home-mortgage loans granted this year will surge to $2.78 trillion, up 72% from 2008’s depressed level, the Mortgage Bankers Association predicts. But mortgage banks have been hobbled in recent months by a dearth of credit, making it hard for them to respond to that demand.
Partly as a result of this credit crunch, giant full-service banks like Bank of America Corp. and Wells Fargo & Co., which don’t need warehouse funding, are increasing their dominance of the mortgage market. Consumers will face higher interest rates and slower service if mortgage banks can’t get enough credit to compete with the giants, mortgage bankers argue.
Frankly, we think it’s a prima facie bad idea to give a greater role to these organisations, which have proven to be inept at what they do. It’s also worth wondering why it’s the policy of the government to undermine Bank of America (BAC) and Wells Fargo (WFC). Our banks will only recover to the extent that stronger banks can expand profits and pick up the lost business of weaker competitors.
The whole industry has been propped up, but there needs to be some Darwinian aspect to the industry, otherwise everyone is just spinning their wheels.