On August 17, 2012, the US Treasury and Federal Housing Finance Agency announced: “further steps to expedite wind down of Fannie Mae and Freddie Mac.” The steps, we are told, will “support the continued flow of mortgage credit during a responsible transition to a reformed housing finance market.” Mostly, the new program has to do with inconsequential bookkeeping involving the relationship between the agencies and the Treasury. The only thing worth noting about these bookkeeping changes is that they make it 100% clear that the agencies are on the road to liquidation. But the planned liquidation process will do nothing to “support the continued flow of mortgage credit”, it can only dampen the flow. Further, the liquidation process would be a responsible transition to a reformed housing market only if it was accompanied by a concrete plan to replace the dysfunctional and now defunct private secondary market with a robust one that works. No such plan has emerged. Fannie and Freddie are being phased out but nothing is being phased in to take their place. The widespread impression, that monetary easing has gone about as far as it can go to stimulate the housing market, is based on prime mortgage interest rates, which have indeed plumbed new lows. However, the rate penalties for less-than-prime conventional loans (those not FHA or VA), set by Fannie and Freddie, have increased sharply.

The qualification requirements set by Fannie and Freddie have become extremely restrictive, and those set by many lenders selling loans to the agencies even more so because of fears of having to buy them back. Two strategically important groups have been particularly hard-hit by excessive stringency. One is self-employed, who are predominantly the small business owners who are a major potential source of employment growth. The other are investors who buy homes to resell at a profit, who are needed as major purchasers of foreclosed homes sold by lenders.