Proposal Seeks to Restrain Fannie Mae and Freddie Mac

by 21 Feb 2013

It may be difficult to envision the mortgage market in the United States operating without the massive loan guarantees extended by Fannie Mae and Freddie Mac, but such a vision is at the heart of a proposal that will be unveiled in the few days by a group of former lawmakers and government housing officials.

The proposal will come from the Bipartisan Policy Center, a think-tank and policy research group comprised of figures such as Mel Martinez, former Secretary of Housing and Urban Development (HUD), and George J. Mitchell, a retired Democrat from Maine who served in the Senate from 1989 to 1995. Under this proposal, Fannie Mae and Freddie Mac would be liquidated to recoup the bailout funds due to American taxpayers, and a new government-sponsored mortgage entity would be created to provide limited guarantees.

A Massive Mortgage Portfolio

Although Fannie and Freddie were publicly-traded corporations and Wall Street darlings prior to the disastrous collapse of the housing and mortgage markets in 2008, they have always enjoyed certain government protections due to their intrinsic role in the real estate economy of the U.S. They are currently under conservatorship by the federal government due to their last-minute financial rescue by taxpayers, but their roles in guaranteeing mortgages are believed to have kept the U.S. from descending into a full-fledged economic depression.

The secondary mortgage market in the U.S. deals primarily in mortgage-backed debt securities that would not be possible to create and trade without the guarantees from Fannie and Freddie. About 80 percent of mortgages would not be approved, closed or funded without a government guarantee from either Fannie or Freddie. Without these guarantees, the U.S. Treasury would probably not get involved in purchasing mortgage-backed instruments, which would send interest rates skyrocketing and create a general apathy in the home lending markets.

Encouraging the Assumption of Risks

The upcoming proposal has already garnered strong bipartisan criticism. The Federal Housing Finance Agency (FHFA) is working on slimming down the role of Fannie and Freddie in shouldering most of the ultimate risk in the U.S. mortgage markets, but retail lenders are still flocking to them despite higher fees and stricter guidelines. The Mortgage Brokers Association and the Federal Reserve Bank of New York have their own ideas about reducing Fannie and Freddie's role in the mortgage markets, but none are calling for a complete exit.

The Bipartisan Policy Center would like to encourage retail lenders and investors of mortgage-backed securities to take on greater risk and responsibility before the government provides a guarantee. Critics point out that such a policy will drive up borrowing costs, which will ultimately be passed on to homeowners.

COMMENTS

  • by howard | 2/22/2013 11:54:20 PM

    No fannie or freddie but a new entity that wont give anything but basic gurantees, sounds like the end of the housing market for the average guy and one just for the rich. Well not true, the banks will move in and create even bigger amounts of cmo's, mortgage backed securities and other exotic forms of betting where they will double and triple down on them. These will be created at their rates, no you say there will be competition just like when they were pricing the libor index which ripped TRILLIONS from our hands and into the Banker's cofers. You say we can trust them as they have learned from the past then why are they spending millions trying to weaken the Dodd-Frank law. They are too big to fail, too big to break up, and too big to bring to trial.
    Fannie and Freddie can be run responsibily with the proper management put in place and overseen by the government and an independent auditor. What is important is that they brought uniforimity to the market place and brought a bit of competitivness to the pricing. One only has to go to a bank and see their rates and then go see a broker's rates, they are usually more competitive than the bank's. This is a knee jerk reaction that will put us back into the 1920'/30's lending atmosphere. DONT LET THEM DO IT, CHANGE WHAT YOU HAVE AND IMPROVE IT. The government will get theri money back soon enough, actually we should be suing the banks for much more than they are settling for over the LIBOR Scandal and the Mortgage backed securities scandals of the past 7 years or so.

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