Housing Policies That Led to 2008 Collapse Still in Place, Says Freddie Mac Economist

A house for sale in the Hollywood area of Los Angeles in 2012. (AP Photo/Damian Dovarganes)

WASHINGTON – Housing policies that drove government-sponsored enterprises like Fannie May and Freddie Mac into insolvency and triggered the 2008 financial crisis remain in place today, fueling the possibility of a repeat, a former economist with Freddie Mac said Thursday.


The government seized Fannie May and Freddie Mac in September 2008, and the companies remain under government control today. Profits from the companies have been flowing to the government since 2012, meaning the entities are operating essentially on zero capital. Experts at the Cato Institute on Thursday described this as a dangerous situation that continues to encourage heavy debt and unrealistic purchases in the pursuit of the American Dream.

Economist Susan Wharton Gates worked for Freddie Mac in various roles from 1990 to 2009, when David B. Kellermann, acting chief financial officer, hung himself in his Vienna, Va., basement. Gates decided then that it was a good time to walk away, noting that many at the company shared her disillusion. Gates, whose primary responsibility was to craft public statements for executives interacting with Congress, decided to a write a first-person narrative about her experience. This resulted in Days of Slaughter: Inside the Fall of Freddie Mac and Why It Could Happen Again, a book she described as a “sense-making” narrative.

“What’s this thing called the American Dream?” she asked Thursday. “Why are we so attached to that, and then what are the federal policies and proclivities that actually keep it running and rolling, as well as lead to its distortions and dysfunction?”


She explained that many of the housing policies that precipitated the collapse, which she thought were positive before the crisis, are still in place today. She described mortgages that were well-intentioned but naïve. These loans were aimed at equalizing minority and white home ownership rates, but the results were devastating losses to communities of color, communities that are still slowly recovering from the housing crisis.

According to Landon Parsons, an investment banker and senior financial advisor for Moelis & Co., the only backup support for Freddie and Fannie is $260 billion in federal support, which he described as “just dangerous.”

“The U.S. taxpayer is not capital,” said Parsons, who advises shareholders at both Fannie May and Freddie Mac. “The U.S. taxpayer needs to be protected by capital. Running these entities with zero capital just makes no sense to me at all.”

Moelis & Co. recently introduced a blueprint for what it believes can restore safety to the government-sponsored enterprise structure. The plan calls for raising about $180 billion in capital by allowing the GSEs to keep earnings, allowing shareholders to invest new money and raising additional funds through capital markets.

Treasury Secretary Steve Mnuchin has signaled a belief that federal intervention in the housing market is too great, and his department is exploring pulling back on government ownership.


John Allison, former CEO of BB&T Corporation and former CEO of the Cato Institute, argued that government subsidies distort markets and reduce standard of living. He said government subsidies from Fannie and Freddie have not enabled people to buy houses but have encouraged people to buy bigger houses. He said the GSE structure was well-intentioned, but it’s ultimately destructive.

Ike Brannon, a visiting fellow at the institute who moderated the discussion, talked about the current market for new homes. According to Brannon, new housing starts in 2016 were recorded at 60 percent of what they had been before the Great Recession. One would have to go back as far as 1966 to find a housing starts rate as low as 2016. Regulatory burdens have increased the costs of building a new home by about 30 percent in the last eight years, he said, leading to greater demand for existing housing stock.


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