Government-subsidized home loans seldom necessary, says professor

Gopalan sees end for Freddie Mae, Fannie Mac

Spurred on by discussions in the U.S. House of Representatives in late January, some elected officials are agitating for the abolishment of Fannie Mae and Freddie Mac, two of the nation’s most popular home mortgage lenders.

Radhakrishnan Gopalan, Ph.D., an assistant professor of finance at Washington University’s Olin School of Business, told Smart Money magazine recently that he doesn’t see the need for a semi-government entity to make mortgages more available for prime borrowers.Gopalan

If a borrower is sufficiently creditworthy, I don’t think they need a government-subsidized mortgage; they should be able to get a mortgage in the private market” in normal times,” Gopalan said in a Feb. 1 article in Smart Money.

One area where a government agency is needed, Gopalan added, is to promote home ownership for certain parts of the population or for certain regions of the country where the private market isn’t willing to go.

Intended to help potential low- and moderate-income homebuyers find mortgage financing, Fannie Mae and Freddie Mac trace their roots to the 1930s. Later chartered as “government-sponsored entities” or GSEs, Fannie Mae and Freddie Mac together now purchase or guarantee between 40% to 60% of all mortgages originated annually in the United States.

As noted in the Smart Money article, Rep. Barney Frank (D., Mass.) said in a Jan. 22 hearing that the House Financial Services Committee this year will recommend abolishing the agencies and coming up with a new system of housing finance. Rep. Scott Garrett (R., N.J.), too, has expressed concern about the mega lenders. He responded to President Obama’s recent proposal to put restrictions on banks by saying that any financial regulatory reform that does not address Fannie and Freddie is not true reform.

Such comments are setting the stage for a debate in the capital over how to at least revamp Fannie and Freddie, which operate as government-sponsored enterprises or GSEs. Until the financial crisis hit, both companies were privately owned but publically chartered. In September 2008, as the two lenders tottered on the brink of insolvency, they were placed into conservatorship (and effectively nationalized with the government taking an 80% stake). In spite of this recent history, Fannie and Freddie have taken on an ever-increasing role in the mortgage market as loan originators, since large banks are still reluctant to lend directly to homeowners.

So what could a new overhauled government housing agency look like?

Gopalan, who teaches finance in the Olin School’s MBA program, suggested in late 2008 that he sees a significantly diminished role for Fannie and Freddie in the long term,

“When they were established, the market was not doing a good enough job of making homeownership available to the common man at a reasonable price,” Gopalan told syndicated columnist Michelle Singetary. “Liquidity has increased. And think about it: The root cause of the current crisis is that mortgages were too easily available to many people who shouldn’t have gotten them.

“The ideal option would be to gradually downsize them, limit their activity to only those sectors where there is a genuine need for government support for mortgage finance and let the private sector take over the financing of most mortgages,” he said.

Gopalan believes the capital markets are “sufficiently well developed to make mortgages cheap and accessible.”

Read More:

Say Goodbye to Fannie and Freddie? Not Quite at

Radhakrishnan Gopalan ‘s faculty homepage

Related News Tip: Gopalan comments on mortgage giants’ federal bailout and the impact on taxpayers, shareholders, the mortgage market and the confidence of the American people (Sept. 2008).