MORTGAGE MELTDOWN

A writer offers an analysis of Fannie Mae’s contribution to the 2008 mortgage crisis coupled with recommended reforms. 

There’s been no shortage of ink spilled on anatomizing the economic catastrophe of 2008, including specific analyses of the mortgage debt crisis. But there has been a surprising deficit of attention to the role played by Fannie Mae, the focus of Mukherjee’s debut book. He argues that years of imprudently weak regulation led to the growth of Fannie Mae into “an unrestricted mortgage behemoth” with more than $3 trillion in assets. Fannie Mae was transformed over time—partly as a result of its winning a territorial war with the Department of Housing and Urban Development—into a government-sponsored entity with an implicit federal guarantee of its strategic bets, in effect creating an unstable model within which private reward and risk were encouraged by the promise of taxpayers’ bearing the burden of failure. At the heart of the problem was Fannie Mae’s tremendously profitable guaranty arm, which allowed it to guarantee homeowner mortgages like an insurance provider in exchange for a fee. But when a deluge of home foreclosures compelled it to dole out massive payouts, Fannie Mae was egregiously short of funds since it had already spent its reserves on “doomed” bonds. The author furnishes a brief but impressively thorough history of Fannie Mae as well as an excellent primer on the housing market’s basic structure. In addition, he gives pragmatic but original solutions to the organization’s troubles, starting with a reduction of liability to taxpayers by winding down its portfolio. He also advocates the creation of a private servicer enterprise, which “would have the sole purpose of servicing the 120-day delinquent mortgages” from the Government Sponsored Enterprise. Mukherjee’s analysis is astonishingly concise given its breadth and, despite the technicality of the subject, remarkably accessible. He also manages to avoid even a whiff of partisan allegiance—his perspective is fashioned out of rigorous analysis versus political ideology. Finally, his suggestions for reforming current lending practices—especially those aimed at discriminatory practices—deserve a wide audience. 

An astute and wide-ranging assessment of an urgent economic problem.