For one reason or another, my little blurb on “Real Estate, Business and the Economy… True Hope at Last” sparked a slew of comments and inquiries regarding Fannie Mae and Freddie Mac. …All this despite not having mentioned either of them in my “blurb”. So, recognizing a topic of interest, today I humbly toss out a couple cents for your better consideration.
As foundation, know that I lean toward the belief that competition, as only possible in the private sector, can achieve better results than any no-competition environment, such as with government. I feel this way because even should an entity be both effective and efficient, without competition to drive costs down, we get $700 hammers. While most evident in government, the same is witnessed in the private sector when the environment fails to produce competition, such as when a private company holds a patent-based, government permitted, monopoly over the rest of the market. We’re left to their pricing mercy. …Thus, my preference for the role of government in business is simply to limit itself to the promotion of fair competition at home and with countries abroad that may wish to foster unfair advantages for themselves.
By now, my sentiments toward government or pseudo-private entities, such as Fannie Mae and Freddie Mac, are probably fairly easy to guess. I’d just rather not have them… Similarly, I don’t support program manipulations that transfer, for example, risk from lender to government, as exists with FHA’s lending program. They muddy the waters and remove controlling accountability from the system.
As such, it may surprise you all that… for the moment… I would advise AGAINST touching ANY of them… “Are you a fool?!” you ask… “Have you lost your mind?!”
Perhaps, however, consider the following and draw your own conclusion. The Fed (government) is holding interest rates at near zero (0) % in an effort to stimulate lending and the economy. However, it fails to help small business, as over 90% of small business credit is tied to the value of owned real estate and that market is still down. More to the point, manipulating and holding interest rates low is keeping the private sector away from lending at home as they fear interest rate’s inevitable rise. In this global market, they needn’t be content at home and can lend elsewhere to more thriving regions, such as Asia, or even Brazil where interest rates on real estate command 10.5%.
In sum, left alone and without manipulation, I would certainly agree that we wouldn’t need these institutions. However, the reality at the moment is that Fannie Mae, Freddie Mac, and the FHA are covering over 90% of all real estate loans on a suffering market… and artificially low interest rates are keeping the private sector elsewhere. A real estate market rebound is needed for a true small business recovery and a small business recovery is needed for a true economic recovery. So until the RE market has a stronger footing and interest rates have risen again, a private sector solution isn’t likely to present itself. For the moment, we must leave these institutions in place.