Sustainable Land Development Today - January 2009 - (Page 18)

would wipe out the equity. As a result, even though just a small percentage of Fannie’s and Freddie’s mortgages are delinquent, the potential losses are huge. A fatal elixir of thin capitalization, high credit ratings, and preferential government treatment has created a system that privatizes profits but socializes losses. When Fannie and Freddie do well, their shareholders reap the benefits, but if things go badly, Washington (taxpayers) picks up the tab. If Fannie and Freddie were private companies, there would have been a natural check: companies with more debt are usually seen as riskier, and that makes shareholders and bondholders less willing to invest in them. Conversely, if they were government agencies, budget constraints would likely have limited the scope of their lending. Since neither the market nor the state checked their growth, they were able to swell extravagantly. The result of all this was that the companies reaped the rewards of the private sector while enjoying the security of the public sector. The Future This financial bailout passed by Congress, estimated to cost anywhere between $25 billion and $50 billion, is expected to stabilize the financial markets and, it is hoped, that propping up Fannie and Freddie will help pull the housing market out of its slump. By explicitly standing behind their debts, it is expected that the wide premium over Treasury bills that Fannie and Freddie securities currently trade at will shrink. According to some estimates, reducing this interest rate premium by one percentage point could reduce the effective cost of buying a home by as much as 15 percent. The money from the Treasury Department will be used to strengthen the companies’ balance sheets and shield them from insolvency. The “pro” of such a quick-fix bailout attempt would be the immediate stabilization of the markets, with the “con” being that reconstituting them in the same flawed structure may lead to a repeat performance. In their present forms, Fannie Mae and Freddie Mac have outlived their use- ful purpose. Today’s housing market bears little resemblance to that of the Depression, when Fannie Mae was first chartered, or even 1968 when it ceased to be a government agency and became a GSE. For this reason, some critics believe that Congress should, instead of throwing them a lifeline, begin to slowly shrink these specially privileged GSEs. These entities were created for the purpose of greasing the Depression-era mortgage business for low-income home buyers by repackaging loans as securities. As it stands now, Fannie and Freddie have gone way beyond helping the poor and are now backing loans for the wealthy. Fannie and Freddie are not essential to the mortgage market, and if they were wound down in an orderly process over a number of years, the market would pick up the business that they left behind. As a result, many feel that Congress should maintain their GSE status but downsize Fannie and Freddie to minor roles strictly for the poor, for which they were originally designed. The SNOUT®, The Bio-Skirt® and Stainless TrashScreen™ Wise Stormwater Infrastructure Investments irt Bio-Skasy an e r is fo retrofit + SNO ice! serv 0 35,0UTs0 in Stretch your Stormwater dollars with components from BMP. Helping you reduce stormwater pollution and bring in your projects in under budget since 1999. New TrashScreen™ Best Management Products, Inc. Call us at 800.504.8008 or Learn more at bmpinc.com Circle 144 • or www.SLDTonline.com/webcard 18 January 2009 Sustainable Land Development Today http://www.bmpinc.com http://www.bmpinc.com http://www.SLDTonline.com/webcard

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Sustainable Land Development Today - January 2009 Contents Our Voice Your Voice The BottomLine SLDI in Focus Calendar Industry Rebound Will Require Balanced Approach What Happened to Fannie and Freddie? Added Value in Entitlements Industry Spotlights Technology Wastewater Innovation Classifieds Advertiser Index Editorial Board SLDT Resources Last Word

Sustainable Land Development Today - January 2009

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