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