Freddie Mac: American Amnesia
Freddie Mac, slowly getting back on track after its $72.3 billion bailout in 2008 by the US taxpayer, has released its second quarterly ‘profit figures’- paying the Treasury more money than it was given in government aid.
Its second quarterly net income rounded up to $5 billion, an increase from $4.6 billion in the previous quarter. This is the second largest profit increase in the company’s history, largely due to the recovery in US real estate, a decrease in delinquencies and successful rate hedging.
The timely announcement came one day after President Obama’s call for a political effort to ‘wind down’ Freddie, effectively ending the federal government’s involvement in housing finance. The GSE currently has an interest in over half of all American mortgages. Fannie Mae, its depression-era stable mate, is set to release its figures; it seems likely that they will paint an equally rosy picture. Don Layton, chief executive of Freddie Mac, refused to comment on the GSE’s future or the quality of its profits.
The President’s reinvigoration of a longstanding commitment to reform the government’s role in housing finance has reopened the debate on mortgage subsidies and consequent market distortion. The President has thrown his weight behind a proposal which would create a private agency that essentially replicates Freddie’s mortgage securitisation model. The proposed agency’s losses would benefit from a 10% cap guaranteed by the federal government.
President Obama said that the action was vital to ensure that the US property market doesn’t simply ‘re-inflate the housing bubble’ and it was time to ‘turn the page on this kind of bubble-and-bust mentality.’
Although lacking in substantive detail, it would seem that the proposed agency is simply a less-transparently government guaranteed structure, with the same bubble-inflating implications. A 10% tumble in US real estate values is more business as usual than an apocalypse. It used to take a generation to forget the lessons of a major financial crash- perhaps American memories are getting shorter.
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