Fannie Mae and Freddie Mac

Now that they're ours, what do we do with Freddie and Fannie? Last weekend, the federal government essentially took over control of Fannie Mae and Freddie Mac, the two largest sources of financing for new homes. The problems of creditworthiness of loans are now ours, the taxpayers.

What should we do with this new responsibility?

The first thing we should do is to not repeat the mistakes that got us into trouble the first time.

As several commentators have pointed out, Fannie and Freddie were not deeply involved in the sub-prime crisis: they maintained higher underwriting quality standards than many other lenders. But they essentially went broke just the same. Staying the course with underwriting standards just invites a repeat of the current crisis the next time the economy is under pressure and consumers who borrow for loans get stretched.

But indiscriminately tightening underwriting standards will harm an already weakened housing and real estate industry. In my previous blog, "Real Economic Stimulus with Energy Efficiency," I noted that mortgage defaults are very highly correlated to neighborhoods that are sprawling and have low transit service, and consequently require their residents to spend a lot of money on driving.

There is an easy way to solve this problem. The new underwriting standards should be based on the total of monthly obligations resulting from transportation costs, utility bills, and house payments all taken together, rather than considering house payments to the exclusion of these other two large obligations.

For a typical new home, which is priced at about $225,000 (median price), the cost of driving to and from the home over the course of a 30-year mortgage exceeds $300,000 for homes located in sprawl and the energy costs exceed $75,000 even if the home meets national model energy codes.

Location efficiency and energy efficiency could increase real affordability substantially: houses that qualify for the federal tax credit use about a third less energy than average while costing only a few thousand dollars more (if that); and houses in location efficient neighborhoods can cut driving expenses by more than three quarters.

New underwriting standards that are more stringent in general but recognize the increased affordability of energy efficient and location efficient housing could do more to promote growth in housing and encourage growth that is financially as well as environmentally sustainable.