Fannie Mae and Freddie Mac continue to dominate the secondary mortgage market amidst dying cries for reform. Despite the failures of the financial crisis, little has been done to curb the influence of the government-sponsored enterprises (GSEs) on the housing market.
The twin powerhouses were not solely responsible for the devastation of mortgage lending. The GSEs’ role was largely fueled by Wall Street, who encouraged mortgage originators to issue subprime mortgages to meet high investor demand for mortgage-backed bonds.
In fact, Fannie and Freddie’s survival played a pivotal role during the crash. Mortgages originated by the GSEs were necessary for refinances of existing mortgages as well as the few home purchases which did occur during that period. Relations with foreign investors were also rescued, as a default on foreign finances due to the GSEs’ elimination might have escalated into nasty economic conflicts with global partners.
Congressional crackdowns on mortgage origination standards after the crash have wounded Wall Street’s pride, but not that of the GSEs. Qualified mortgage and ability-to-repay regulations implemented by the Truth in Lending Act (TILA) following the crisis effectively prohibited subprime lending practices.
These reinstated fundamentals now mostly prevent Wall Street from enjoying the advantages subprime lending brought them during the Millennium Boom. These regulations also greatly reduced the risk of future taxpayer bailouts, further padding the throne for Fannie and Freddie.
Disgruntled, Wall Street took their
deflated ball and went home, leaving Fannie and Freddie to almost single-handedly move the secondary mortgage market.
Now that the housing market is mostly recovered, in large part through Fannie and Freddie, cries for reform of the GSEs have quieted. Each passing day lessens the strength behind the reform effort and further ingrains the GSEs’ place in the mortgage market. However, some zealous holdouts are still feebly struggling to enact change – a bill to replace Fannie and Freddie with the Federal Mortgage Insurance Corporation (FMIC) was introduced in 2013, but nothing came of it.
As long as lending practices remain limited to qualified borrowers, the risk of subprime lending demolishing the market again is small. Mortgage-backed bonds are no longer the hot attraction of investments, and the decreased demand means Wall Street has no cards left to play to interfere with the GSEs. Unless Wall Street takes up qualified mortgage standards and learns to make money through good lending practices – unlikely since they have yet to admonish themselves for their actions leading to the crisis – Fannie and Freddie are here to stay.
Re: “The Rescue of Fannie Mae and Freddie Mac,” from the Journal of Economic Perspectives