Fannie Mae and Freddie Mac were created as government sponsored entities (GSEs) to be, as they have become, a crucial force in shaping our national housing policy. These GSEs now own or guarantee over two-thirds of the nation’s home mortgages. Both GSEs play a fundamental role regarding who gets mortgages and how much they will cost.
In a testament to their influence, these two GSEs have always been regarded by bond market investors as being implicitly guaranteed by the federal government. However, homeowners began defaulting en masse on their GSE-guaranteed loans in 2008. The defaults in turn began to destroy the financial health (net worth and capital reserves) of these two mortgage giants. They then began to collapse in tandem with the housing market. In a final death blow to the GSEs’ viability as publicly owned entities, both were placed under the conservatorship of the Federal Housing Finance Agency (FHFA), effectively nationalizing them and making the implicit government guarantee absolute.
However, Fannie and Freddie’s future is unknown – as its fate is highly politicized since both are donors to many legislators. The stakes for the housing market of buyers and sellers are high. These GSEs own or guarantee more than $6 trillion of the nation’s home mortgage paper. They have already devoured $112 billion in taxpayer dollars since their collapse and have about $3.9 trillion in outstanding obligations to bond market investors.
The Fannie/Freddie nay-sayers, mostly from the “No-to-everything” legislative camp, want both organizations to be abolished, blaming the housing collapse on the government (not the Wall Street Bankers and the biggest mortgage banks who peddled their wares to the bond market investors of the world). Those who want to retain Fannie/Freddie in some form, mostly the public assistance groups siding with 80 year homeownership policies of the government, point to the market collapse as a reason why a centralized operation for mortgage financing is needed.
Policy makers in Washington have remained largely mum. However, their actions indicate Fannie/Freddie will not likely be abandoned, as Fannie/Freddie’s $400 billion ceiling on their federal credit line with the US Treasury has been removed, making it unlimited and thus extending their commitment to supporting the resale housing market with mortgage money. A delicate balancing act is at play while the GSE giants are being fixed, yet at the same time the flow of money into mortgage originations must not be obstructed by the simple “No-to-everything” mentality which will squash the tentative economic recovery which is just beginning to take hold – thanks primarily to subsidies such as the housing tax credits.
first tuesday take: The state of Fannie/Freddie is best summed up by the powerful and well-experienced chairman of the House Financial Services Committee who commented, “I’ve said we should abolish Fannie Mae and Freddie Mac in their current form and come up with a new system of housing finance. I can’t say when. And I don’t have any idea what that new system will look like. No one, I believe, knows. All we really know is that we need something new.”
Until market fundamentals return, and homebuyer and private mortgage backed bond (MBB) investors regain their confidence and return to investing in mortgages as risks of loss diminish, every bit of extra support from Fannie and Freddie is welcome. The federal government is the absolute lender of last resort when most privately-owned lending institutions are loaded with toxic assets (primarily mortgages) or are otherwise unwilling to quickly declare their portfolio losses and begin lending again.
The government, either on the taxpayer side (which has just begun with Fannie and Freddie) or on the central bank side (and the Fed is about to exit the MBB market after funding $1.3 trillion of mortgages during the past 18 months), is the sole entity capable of keeping money available at low interest rates when the bankers themselves fail. Bankers, as past conduct has shown, are prone to fail since they are unable to tame their animal instincts for outlandish behavior in their efforts to get a competitive advantage over their peers.
While Fannie and Freddie will become something different, but still fully supportive of the real estate mortgage market, the parameters for the conduct of mortgage lenders will soon be reconfigured to pre-‘80s dimensions, since deregulation of money always goes up in smoke. We all must learn what bankers have always known – that money costs the government nothing to create and creating money is an absolute necessity for all economies. However, these are attitudes that engender disrespect for the money that is created and distributed through the nation’s private bankers. The charge for this money given to the nation’s private bankers must be increased at some point as the recovery gets underway if the money is to earn their fear and respect again.
When the secondary mortgage market is in distress, as it most certainly is now, only the government as the provider of all money is able to control its management and take prompt and uniform action as needed to keep cash flowing into the mortgage markets. For evidence of the government’s capacity, look no further than the curative government intervention in the wake of the legendary 2009 collapse of the Wall Street bankers – those profit pumping hearts of our capitalistic system – who defaulted and pled to be socialized by a government bailout. Let’s hope Congress says “yes” and goes with homeownership for the long haul.
Re: “Cloudy future of Fannie and Freddie,” from the New York Times
Connor:
What is going to happen when the interest rates increase and the prices for which new buyer’s will qualify correspondingly further decrease.
Are not the two main factors that influence property values today the cost of money in relationship to what amount of loan can be acquired. When this happens, wont’ those now holding the current loan debt again find themselves up side down on their assets?
Isn’t is true that the original cause of the meltdown was the toxic mortgages (loans). The mortgages became toxic as a result of the extended holding down of interest rates that inflated housing prices. Example: $12,000 available annually for housing payment at 10% allows for a $120,000 loan to be acquired. The same $12,000 annually when rates were 4% allowed for the acquision of a loan of $300,000. When the rates were again raised the values correspondingly fell. It was the artificially inflated values that was the culpert, the packaged securities were after the fact and a way of those with knowledge of the financial market’s to unload their mistakes.
Fannie and Freddie are an eminent disasters. What’s the figure for Fannie, they are holding around 47% of the current market’s loans with 3-1/2% dowpayments along with 580 to 620 FICOs to qualify. With the middleclass that drove the mid price market now credit challenged, when rates increase and housing prices again decrease, there won’t be any safety net of available buyers for those who want to unload this toxic babies onto the market.
I guess there is one ray of hope, maybe the Chinese Government will take a few million properties off our hands in exchange for a lowering of our debt and the Oil rich nations can pick up the rest for their trade balances. Maybe we can rename our nation Chinarabia. The product of American ingenuity. Good work America!
I commend to you a piece I published June 26, 2003 in which I predicted that Freddie Mac and Fannie Mae would not make it – http://www.investram.com/Evolving_Risk.htm.
Most people don’t know or have forgotten the three primary objectives laid out by Freddie Mac’s founds in the early 1970s, but people who have been around for a long time (like me) remember. The three primary objectives the founders of Freddie Mac were to – 1) improve the national secondary market for residential mortgage, 2) turn the improvements it developed over to the private sector, and 3) collapse Freddie Mac – (YES, COLLAPSE FREDDIE MAE, that was a major objective of its founders).
If these objectives had remained in place we would now have a secondary market made of many mini-Freddie-Fannies. But, instead we evolved into two firms investing and insuring almost all of the residential mortgages in the U.S., which operated very much like two gigantic hedge funds. During the heyday, they did very well and did not require taxpayer assistance. But, as I stated in the conclusion to the paper I provided a link to above, there is no guru on the face of the earth who can efficiently manage all of the risks associated with the Freddie-Fannie hedge fund portfolios. So, Freddie and Fannie didn’t make it and now they are wards of the state.
Of course, under some market conditions many if not most of the mini-Freddie-Fannie firms that would have been around if Freddie had collapsed may also not have survived. But, it is unlikely that all of the mini-Freddie-Fannies would be taking on the same amount or types of risks therefore it would be less likely that they would all go out of business at the same time. It would be kind of like banking. In today’s market downturn, some banks don’t make it and others are doing quite well. If we op to recreate Freddie and Fannie into something similar to their old gigantic self, and have them be the dominate player in the residential mortgage market, it’s not a question of if we have another blowup, it’s a question of when. It could be years into the future (Freddie operated profitably for almost 40 years), but with just two firms managing multi-trillion dollar portfolios of mortgages, the market will blow up again at some point and taxpayers will once again have to bail out the government sponsored lenders, making the government the lender of last resort for all residential housing. That’s too big for me. And, where does it say in the Constitution and the federal government is supposed to be responsible to managing national residential mortgage portfolios, directly or indirectly.
Basing an article on a “not fit to print” article from the New York Manefesto is a waste of effort.
My Real Estate principles manuals state that Fannie and Freddie were created as lenders of last resort to bring STABILITY to the market!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
When Gov’t uses our money to make Facioliberal decisions (FREE MONEY FOR ANY HOMEBUYER), what do you expect to happen????????????????????
No Fate…