Title: "Guaranteed to Fail: Fannie Mae, Freddie Mac and the Debacle of Mortgage Finance"
Authors: Viral V. Acharya, Matthew Richardson, Stijn Van Nieuwerburgh, Lawrence J. Wright
Publisher: Princeton University Press, 2011; 232 pages; $24.95
I love a double entendre. The team of authors who wrote "Guaranteed to Fail: Fannie Mae, Freddie Mac and the Debacle of Mortgage Finance" apparently do, too. The book’s title is not only descriptive, but a pithy primer for those who are unclear on the nature of the debacle to which it refers.
The federal government has now spent over $150 billion in taxpayer funds — and counting — to bailout these agencies. Those guarantees, the authors argue, do nothing to prevent the inevitable failure of both entities.
Funny enough, the way Fannie and Freddie got in trouble in the first place was by guaranteeing billions in subprime loans that were also set up from the beginning for failure, resulting in them collectively holding a bag full of over 150,000 foreclosed homes.
Fannie and Freddie are, or I should probably say were Government Sponsored Enterprises: privately owned companies created by Congress to further the ultimate aim of making homeownership more affordable and available to a wider group of Americans than it would otherwise have been.
When the subprime mortgage market melted down, Fannie and Freddie were bailed out and taken over by the federal government, which now essentially owns the terminally ill behemoths. "Guaranteed to Fail" calls attention to Fannie and Freddie’s ongoing multi-billion-dollar life-support system, and calls for massive reforms to the agencies.
And presciently so; in the time between its writing and its publication, the Treasury Department itself sounded a nearly identical alarm. In February, the Obama Administration issued a white paper proposing to wean Fannie and Freddie off their reliance on taxpayer funds, gradually reduce the entire mortgage market’s reliance on Fannie and Freddie funds and guarantees, and dissolve the two agencies entirely over five to seven years.
The Treasury proposal, the opinions of many economists, and even members of the Wall Street elite like Chase CEO Jamie Dimon (who recently labeled Fannie and Freddie "the biggest disasters of all time") validated the premise of "Guaranteed to Fail," as recent (unsuccessful) calls for the elimination of the mortgage interest deduction have echoed some of the book’sreform suggestions.
All these reform proposals have left many "Main Streeters" in a state of panic and confusion, not understanding why anything that reduces the numbers who can become homeowners could possibly be construed as good for society — especially considering that making mortgages harder to get makes their own homes harder to buy and sell.
If you are wrestling with this confusion, "Guaranteed to Fail" will demystify things for you. It not only provides a clear, complete history of how we as a nation got into this mortgage mess and how Fannie, Freddie and other government subsidies of homeownership (and not for renting) have actually set low- and moderate-income Americans up for failure, created incentives for all Americans to overextend themselves on their home loans, and even created a home-value-impairing surplus of housing across the country (this last point has also recently been validated by last week’s Census data-backed revelation that many foreclosure hot spot states have between 10-20 percent vacancy rates in their housing stock).
The authors of "Guaranteed to Fail," all professors, weave together historical facts, dive deeply into the economic dynamics and motivations of all entities and players involved in our national mortgage markets, and present nuanced reform proposals (moot or not), with an impeccable level of research and logical rigor, in language laypeople will still understand and appreciate.
If you’re an armchair real estate economist, or just a homebuyer or owner trying to understand the various, massive impending changes in American mortgage finance this bookwill satisfy your curiousity and maybe even shift your thinking.