Britannia Radio

Soros: Get 'Unsound' Fannie, Freddie Out of Lending

Friday, 26 Mar 2010 09:19 AM

By: Julie Crawshaw

George Soros wants Fannie Mae and Freddie Mac to remain as mortgage insurers but get out of the mortgage lending business altogether.

"The business model of Fannie Mae and Freddie Mac is fundamentally unsound," Soros writes on Politico.com.

"These public-private partnerships were supposed to serve the public interest and the interest of shareholders. But this was never properly defined and reconciled."

What needs to be done is clear, the billionaire financial speculator says. The mortgage insurance function of government sponsored enterprises, or GSEs, must be separated from mortgage financing.

“Mortgage insurance is the legitimate function of a government agency, especially when the private sector has collapsed,” Soros notes. “A mortgage insurance entity should be run as a government agency.”

“But mortgage financing should revert to the private sector. This would get rid of a business model that has failed.”

GSE management interests were more closely allied with those of shareholders, Soros explains. “They had an incentive to lobby Congress — both to expand homeownership and to protect and use their government-sponsored duopoly status,” he points out.

Because the GSEs extended their activities from insuring and securitizing mortgages to building highly leveraged portfolios of securities by taking advantage of their implicit government backstop, they profited from the growth without bearing the risk of collapse, Soros notes.

“Heads they win, tails you lose,” he says.

Fannie Mae and Freddie Mac are resisting White House-backed efforts to make it easier for homeowners to get loans to make their houses more energy efficient, according to a Wall Street Journal report.

Under the program, homeowners would borrow money from their local government to put towards energy improvements. They would repay the loan over 15 to 20 years through a special assessment added to their property-tax bills.

The program has raised concerns for both Fannie Mae and Freddie Mac over the problems that a first-lien loan could create.

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