Fannie Mae

The economist has a good article on Fannie Mae (FNM).

To many, this is an overdue come-uppance for a company that has been known to call its detractors "anti-housing" and "pencil-brains'. Fannie Mae and its smaller sibling Freddie Mac, which also stumbled over accounting rules in 2003, enjoy special privileges because they buy up home loans, providing liquidity to the housing market. A $2.25-billion line of credit to the Treasury, tax advantages and low capital requirements together imply a government guarantee that translates into lower borrowing costs. The Congressional Budget Office puts the value of this implicit subsidy to the two mortgage giants at $19.6 billion a year.

Does Fannie Mae really deserve to be fed by taxpayers? When it was formed in the wake of the Depression, the company did much to revive America's collapsed housing market. But now there is a vigorous secondary market for jumbo mortgages that could easily soak up the smaller loans dominated by Fannie Mae and Freddie Mac. The companies have also strayed from their mission of helping people afford their own home: they lag behind regular mortgage banks in funding first-time home-buyers, especially those from ethnic minorities. The subsidy is all the more objectionable when so much of it seems to go into shareholders' and executives' pockets and on a huge, and so far effective, lobbying effort aimed at preserving its status. And the subsidy has fuelled such fast growth and high leverage (Freddie and Fannie have $1.7 trillion in debt outstanding) that Alan Greenspan, chairman of the Federal Reserve, has mused that a blow-up could do great damage to the American economy.