It looks like our dear friend Fannie Mae will be passing on to the great secondary mortgage market in the sky, along with her younger brother, Freddie Mac. The Obama administration will be issuing a much anticipated "white paper" outlining some options for the government's role going forward in the mortgage market. I spoke with a friend who is a V.P. at Fannie Mae yesterday, who indicated he's not terribly concerned about losing his job any time soon. These things take time.
Apparently, there will be three different options for the government's role in backing the mortgage market, ranging from "None" to "One" - as in one all-encompassing agency, such as FHA.
The federal governament bailed out Fannie and Freddie in 2008 during the financial meltdown caused by mortgages going bad. This was indeed a case of "too big to fail", and was a justified move at the time (IMO). Fannie and Freddie backed trillions in mortgage backed securities, and for them to fail would have made the current real estate debacle look like a day at the park.
There is some confusion as to what exactly Fannie and Freddie do. Originally, they were formed to increase liquidity to the mortgage market. Translation - a place for banks in rural Iowa to sell their loans in order to replenish capital to continue lending. It's aim was to make capital more available in areas under served by mortgage lenders, i.e. - small local banks.
For some reason, their role seemed to shift during the Clinton administartion to that of a "catalyst to home ownership". I'm not saying that's a bad thing, but there is a difference. While increasing liquidity to mortgage markets is "all business", increasing homeownership is not. Fannie and Freddie both started to dabble in the subprime mortgage market, not by providing subprime loans directly, but by trading securities backed by subprime loans, and that, as we now know, was the beginning of the end. In case you were wondering, contrary to popular belief, Fannie and Freddie do not guarantee loans. They simply guarantee a given return to the buyer of a security that they issue backed by loans that they have purchased. In the real world, the net result is the same... when a loan goes bad, Fannie or Freddie has to dig into their pocket to make up for the losses created by that loan that went bad. Now, it's the taxpayer who is essentially making up that difference.
So...what do we do now? I say, get rid of them altogether, and let the private sector take over. We only need federal involvement to the extent that Federal Housing Finance Agency (created to deal with the Fannie and Freddie mess) could issue lending guidelines and regulations to which the banks and mortgage lenders must adhere if that bank wishes to sell that loan as a "conforming" loan. They could have audit oversight to participating lenders, with very stiff penalties for trying to pass off loans as "conforming" if they are not. The Wells Fargos, Chases, and Bank of Americas of the world have been issuing their own mortgage backed securities for years for their "jumbo" loans. Let them do it for everything. We'll end up with a more competitive secondary mortgage market, rather than one dominated by just two players. In turn, this will likely translate into lower mortgage rates, and a healthier lending environment. Just my opinion of course.
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