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In “Shaky Ground,” financial writer Bethany McLean takes a close look at mortgage-lending institutions Fannie Mae and Freddie Mac, and their role before, during and since the 2008 financial meltdown. She joins Jeffrey Brown to discuss the origin of the housing crisis and where things stand seven years later.
Now, some seven years after the housing crisis, a look at what happened, how well the government fix worked, and where are we now.
All of that can be found in the newest addition to the NewsHour Bookshelf.
Jeffrey Brown has our conversation.
In the world of Fannie and Freddie, strange is actually normal. That's Fannie Mae and Freddie Mac, a little understood, but hugely important mortgage lending institutions. And the line about how strange they are comes from a new book titled "Shaky Ground" that explores their role during and since the 2008 financial meltdown.
Author Bethany McLean, a contributing writer for "Vanity Fair," joins me now.
And welcome to you.
I think we have to start by reminding people what these institutions do, because they play very important roles.
BETHANY MCLEAN, Author, Shaky Ground:
And they're part of the hidden machinery of our world, this critically important stuff in the background that is — that makes up part of our existence, the lives of almost every American, but we don't realize it until there's a problem.
Fannie Mae was created in the wake of the Great Depression. The idea was that if lenders could sell their loans, if banks and other primary lenders could make a mortgage and then sell it to another institution, they'd be more inclined to make that loan. And that would help even out the flow of mortgage credit and thus increase the availability of homeownership in this great, disparate, diverse nation of ours.
And that happened.
So, the old mystery for many people is, what are they? What are they doing?
The latest, the new mystery you're writing about is, why are they still with us, right, after what happened? Tell us, remind us sort of what happened during the meltdown.
So, in the 2008 financial crisis, the fear was that Fannie and Freddie would go bankrupt. The securities they create which are backed by Americans' home mortgages are — they're immense. There are over $5 trillion of them outstanding, and they move through the global financial system like water.
So, the fear was that if these two companies melted down, they would take the global financial system with them. So, the U.S. government put them in a state known as conservatorship, where they were backed, supported by a line of credit from the U.S. Treasury and managed, effectively, by a government agency.
And the idea was, the silver lining in the financial crisis was, we're going to rethink how we finance homeownership. We're going to — there's got to be a better…
A silver lining, right.
A silver lining. We're going to come up with a better way to do this. This thing called conservatorship was supposed to be temporary.
Well, because, I mean, these things are — we often refer to as quasi-governmental, but what it came to look in, I guess, reality is that the private sector had the upside, where the public sector, the rest of us, had the risk.
The big source of controversy about these companies, President Obama actually said it in a speech he gave recently, saying these two companies had to be abolished, because it was, heads they win, tails, taxpayers lose.
And what he meant by that was that, in good times, executives and shareholders of these companies would make money, but, in bad times, taxpayers would be left holding the bag. And that is sort of how it panned out.
Well, so, you said — as you said, they're in conservatorship. There is an ongoing fight. We cover it here occasionally as something bubbles up, ongoing fight over what to do with it.
What to do.
And it's a huge question. It's one that's important to every American's lives. If you have a mortgage, the availability of mortgage credit helps dictate the terms on which you get your mortgage. It's a critical component in home prices, which are the major assets that most Americans have.
Even if you don't have a mortgage, these $5 trillion of securities are out there, and they matter for every part of the global financial market. So, it's this critical, big issue, and we're not talking about it. The companies sit in limbo seven years after the financial crisis, and nobody seems to know what to do.
And it involves very big players. This is what you were kind of look — digging into it, because the investors in it are major hedge funds, foreign governments, including China and Japan. So, there's a lot of consequences for what happens or doesn't happen.
The consequences are huge to average homebuyers, to investors everywhere. And you have this huge fight, indeed, and almost paralysis, because the government doesn't know what to do. The two companies are intensely controversial.
And investors who bought the remaining Fannie and Freddie securities are now agitating for — to get paid. So, you have all these different very powerful people fighting over the outcome of these two companies.
And if it were to be abolished, which is a — if they were to be abolished, which is possible, there is still that argument about the historic role where you started about allowing affordable housing for so many people.
I don't think they will be abolished, and I have actually come to the point of view that I'm not sure they should be. In the wake of the financial crisis, were it not for Fannie and Freddie, the mortgage market would have completely shut down.
You can no longer say that these two companies are unnecessary. I think — I think it's — I think that's part of the problem. Many people believe that without Fannie and Freddie, the 30-year-fixed rate, fully pre-payable mortgage, which is this fixture of American life — I think over 80 percent of the people who got a mortgage in the last six months took out this kind of mortgage — without Fannie or Freddie or some kind of government backstop, this type of mortgage wouldn't exist.
It would be a radically different housing market. Are we prepared for that? I don't know.
You have written about Enron. You looked at the financial crisis. When you looked at these two institutions, even as somebody who is used to looking at this kind of thing, were there surprises?
I think it's — I think it's incredibly surprising. I think it's really weird that you have this most domestic of assets possible, a home, financed by foreign central banks, a home in Kansas that was financed by…
We just don't think about it, right, as we're thinking about that loan.
We just don't think about it, the fact that, since the financial crisis, the hue and cry has been, more capital, give banks more capital and the financial system will be safer.
Fannie and Freddie, with their over $5 trillion of securities outstanding, are operating on next to no capital. If there is a sudden shock to the system, if interest rates go up, if they suffer a loss, taxpayers will have to foot the bill again. And yet…
So, that risk is still there.
That risk is still there, and is a total example of government dysfunction, that we have had seven years to figure out this problem, and we have done nothing.
And do you — and, briefly, do you expect some resolution? You're laughing as I say it. It sounds like no.
I'm laughing as you say it.
There is a big fight over this notion, should we have the government in the housing market or not? Should we just get the government out and let private capital, if you consider big banks to be private capital, finance the housing market? What would the mortgage market look like without that? And how do we — how do we move forward?
And the investors, the big hedge funds who have taken stakes in Fannie and Freddie, are — have points of view on this, too, and are big players in the debate.
All right, "Shaky Ground": The Strange Saga of the U.S. Mortgage Giants.
Bethany McLean, thank you so much.
Thank you so much.
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