Green Shoots Appear; Is it Time to Fix Fannie Mae and Freddie Mac?

by 17 May 2012

(TheNicheReport) -- Fannie Mae and Freddie Mac are two ailing government-sponsored enterprises (GSEs) that have experienced financial peril since 2008, a year that is widely seen as the ground-zero of the global financial crisis. Both mortgage GSEs have depended on the financial assistance of the federal government in just about every quarter of the last few years, but a sign of hope emerged in their earnings reports for the first quarter of 2012.

Fannie Mae reported a significant profit during the first quarter: $2.7 billion. The figure alone may be impressive, but what is more encouraging for the mortgage giant is that it did not have to ask the federal government for financial assistance from the United Stated Treasury. In the case of Freddie Mac, the GSE did not post a profit, but the amount of funds it needed from the government this time around was negligible in comparison to previous requests.

The federal government has come under fire from critics who think that both Fannie and Freddie should have been dismantled instead of bailed out. While both GSEs have not turned a profit in many years, and in fact have consumed a considerable amount of Treasury funds, they are vital components of the American economic recovery. The majority of mortgage loans extended to borrowers in the United States come from guarantees made by the troubled GSEs. Without Fannie and Freddie, there would be no interest from either lenders or investors in the mortgage market. Still, President Barack Obama has hinted at major reform of the GSEs.

Instead of reform, the editors at the influential financial media site Bloomberg suggest that Fannie and Freddie should be let down easy and a new independent agency should take their places. The proposal would call for the new agency to provide financial security to private mortgage lending enterprises and enable the American dream of home ownership, similar to what Fannie and Freddie do today, with one significant caveat: The new agency would only insure mortgage-backed securities, rather than actually guaranteeing home loans.

The above-mentioned proposal would encourage private lenders to provide the necessary liquidity to the American residential mortgage market, rather than depending on Fannie and Freddie to fuel that liquidity based on guarantees and investments. The current status of the mortgage GSEs ties them down to delivering sound financial results to investors and taxpayers. The new agency would not have to answer to either, just like the Federal Deposit Insurance Corporation (FDIC) guarantees monetary deposits in U.S. banks without having to worry about unhappy shareholders.


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