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The ABX Indices: Making the Bad Seem...   In Defense of Credit Indices
Aug 8 2007 10:17AM EDT

Let Fannie and Freddie Buy Profitable Mortgages

Is it a good idea to lift restrictions on the kind of mortgages that Fannie Mae and Freddie Mac can buy? In a word, yes. It's true that Fannie and Freddie have had accounting problems which have led their regulators to keep them on a short leash. But right now the problems in the housing market are many orders of magnitude bigger than the accounting problems at the GSEs. So it makes sense to allow those GSEs to use some of their considerable muscle on buying profitable mortgages, as Democratic senators are proposing.

Dean Baker, on the other hand, doesn't agree. He reckons that the proposal constitutes a "bailout" of hedge funds invested in mortgage-backed securities. But just because something is good for mortgage-backed securities doesn't make it a bad idea – especially not when the action is the simple lifting of a regulatory cap, rather than the expenditure of large amounts of government funds.

It's true that, at the moment, the interests of distressed homeowners (for whom we have sympathy) are aligned with the interests of leveraged investors in mortgage-backed bonds (for whom we have no sympathy). But that's no reason to do nothing to help the mortgage market.

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