When Fannie Mae and Freddie Mac collapsed they lost all the combined aggregate profits they had made in the 35 years from 1971 to 2006, plus losses of another $150 billion or so.
As the United States approaches the bottom of the housing bust, American Enterprise Institute (AEI) housing expert Alex Pollock explains in a recently published piece that there are seven necessary steps to avoid another housing collapse.
1. Not counting the taxpayers' investment, Fannie and Freddie are hopelessly insolvent.
2. They should be formally included in the federal budget.
3. Over the next five years, Fannie and Freddie should be divided into three parts.
4. Credit risk retention by the originators of mortgages should be encouraged.
5. A formal goal of creating a private secondary market for prime, middle class mortgages should be set.
6. Savings should be an explicit goal of housing finance. The need to pay off the mortgage loan over time must be stressed.
7. We should inject countercyclical factors into housing finance, instead of the current procyclical ones.
Alex Pollock had an extensive and varied career in banking, including serving as President and CEO of the Federal Home Loan Bank of Chicago for over a decade, before joining AEI. He is available by phone at 202.862.7190 or through steffanie.hawkins@aei.org
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