Mortgage buyers Fannie Mae and Freddie Mac could be restructured in the near future. We just don’t know how. There are currently dozens of proposals on the table, and a meeting of the minds recently concluded in Washington. Still, the question remains: What should we do with Fannie Mae and Freddie Mac?
These two organizations affect every home buyer in the country. But many people don’t even know what Fannie and Freddie do. Sure, they’ve heard their names thrown around — it’s hard to read a newspaper without hearing about them. But they still remain a mystery to the average American. So we thought it was time to create a retrospective. We call it Fannie Mae and Freddie Mac – Past, Present and Future.
Housing History: The Birth of Fannie and Freddie
History gives us a certain perspective we would otherwise lack. So let’s take a walk down memory lane.
The year was 1938. The United States economy was in terrible shape, in the wake of the Great Depression. Housing was unaffordable for many Americans. So Congress created an organization to make home ownership easier to reach. That organization was the Federal National Mortgage Association — Fannie Mae for short.
The rise of Fannie Mae created what is now known as the secondary mortgage market. Back then (and still today), Fannie Mae purchased mortgage loans from lenders. This increased liquidity within the mortgage market, and made lenders willing to give more loans to more people.
Fannie Mae enjoyed three decades of being a government-sponsored monopoly. It was the only organization that bought (and sold) loans from banks and lenders. In 1968, Lyndon B. Johnson privatized Fannie Mae to get it off the “government books.”
So now you had a private company that received federal support and monopolized a certain area of the American economy. Talk about Frankenstein’s monster!
To “solve” this dilemma, the government created a competitor for Fannie Mae. Thus, the Federal Home Loan Mortgage Corporation — a.k.a. Freddie Mac — was born in 1970.
Fast Forward: Fannie Mae and Freddie Mac Today
For years, Freddie Mac and Fannie Mae were private corporations that enjoyed tremendous profits (from buying, bundling and selling mortgage loans). But that status quo changed in 2008, at the height of the mortgage and credit crisis.
Today, Fannie and Freddie are being managed by the Federal Housing Finance Agency, or FHFA. They were seized by the government in 2008, and placed into a “conservatorship” status. This means that Uncle Sam took over the management (and much of the cost) of running the two organizations. Furthermore, the federal government has pledged unlimited Treasury support to keep Fannie and Freddie afloat.
Freddie recently asked for an additional $1.8 billion in August 2010. Including this request, the two government-sponsored enterprises have soaked up more than $148 billion in government aid since April 2009. They are still posting losses, too, mostly resulting from mortgage defaults. So the government will likely spend more money on Fannie Mae and Freddie Mac in the near future. How much more remains to be seen.
What Does the Future Hold?
The Obama administration is currently seeking proposals on how to restructure Freddie Mac and Fannie Mae. Meanwhile, many people are arguing that we should pull the plug instead. In August 2010, a high-level conference was held in Washington D.C. to discuss the different options for reshaping Fannie and Freddie. There are many ideas on the table, but no singular direction at the moment.
- On the one side, you have supporters who stress the importance of governmental guarantees on home loans. Their argument is that, without Fannie Mae and Freddie Mac, fewer Americans would be able to buy homes. They say that mortgage rates would be higher, as well.
- On the other side, you have the opponents who feel that Fannie and Freddie are part of the problem — not the solution. The Home Buying Institute falls into this camp. We feel that these organizations encourage reckless lending, by removing the long-term financial burden from lenders.
Regardless of which camp you fall into, we can all agree on one thing. The system is broken. We cannot afford to spend billions of dollars a year to keep Freddie Mac and Fannie Mae on life support.