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Fannie, Freddie and Gordon

Wednesday, 10th September 2008

The Spectator on what Gordon Brown should learn from the upheavals in the American mortgage market

Last week, at a cost of a billion pounds or so, the Chancellor announced a package of measures to boost the housing market, including a temporary raising of the stamp duty threshold and some tinkering with shared equity schemes and social housing budgets. In response, the pound — already depressed by Alistair Darling’s observation that Britain now faces arguably the worst combination of economic circumstances in 60 years — fell a little further. Lord Lamont, the last chancellor to resort to a stamp-duty holiday in the face of a house-price collapse in December 1991, pointed out that the device did no good at all for the housing market or his own reputation. A spokesman for the mortgage- lending sector said he expected the impact of Darling’s package to be ‘minimal’; a spokesman for the estate agency profession, currently suffering an extreme decline, said that in London and the South-east the measures would not make ‘a hap’orth of difference’.

This week, the US Treasury Secretary Hank Paulson stepped in to seize control of America’s two largest and most iconic mortgage institutions, Fannie Mae and Freddie Mac, promising a recapitalisation that could cost £110 billion — the world’s biggest-ever nationalisation, many times larger than our own government’s commitment to Northern Rock. The response of world stock markets on Monday morning was to leap for joy at what was widely seen as a decisive turn in the battle to prevent the credit crunch from driving the US and global economy into recession or depression.

Fannie and Freddie provide guarantees over more than half of all US mortgages, and more than 80 per cent of all new mortgages granted this year. They are the central mechanism and, through bond issuance, the major source of liquidity for the entire US system of home ownership. The sharp fall in US house prices had driven them into losses, and bond-market investors had begun to lose faith — even though Fannie and Freddie have always been in a special category of ‘government-sponsored enterprises’, carrying the implicit promise of federal support if they fell into trouble. The consequences of allowing them to fail, not just for the US housing market but for America’s standing in the world in every sense, were unthinkable. Paulson had no choice — but his intervention was seen as both an act of strength and a moment for optimism.

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