As the housing market continues to struggle, with taxpayers carrying much of the burden for defaulting mortgages, many are asking: Is there a future for Fannie and Freddie? And eighteen months after their takeover by the government, Treasury has yet to propose an answer.
When the housing market crashed, it took down the GSEs, Fannie Mae and Freddie Mac, the mortgage giants that, at the time backed about a quarter of U.S. mortgages. Now, however, after less than five years, and because of the contraction of the private mortgage market, their portfolio has grown by almost 150 percent encompassing about two-thirds of all mortgages. And since the government virtually owns Fannie and Freddie, the U.S. taxpayer is on the hook for losses.
Just last year the regulatory limit on losses of both Fannie and Freddie was increased to $200 billion each. Later, the government agreed to provide unlimited financial support, a commitment that some have projected, could put taxpayers at risk for losses of almost $1 trillion.
A conference to be held on Tuesday of this week will discuss the options and future direction of the GSEs in an attempt to stabilize both housing and the two mortgage giants. Most agree, however, that a transition must be gradual in order to avoid further shocks to housing; but there seems to be little agreement upon a strategy or the extent of the changes.
One option would create a co-op between several of the largest lenders with each owning a portion of the new entity; and the government would be required to furnish insurance on the mortgages. Such an arrangement appeals to some, as it would remove much of the risk to taxpayers and would encourage the participating lenders to monitor the quality of mortgages being supplied by the others.
Others have suggested that Fannie and Freddie be broken into several smaller, competing operations. A few have even recommended a permanent nationalization of the GSEs. Then, of course, the big banks have their own ideas.
Is there a future for Fannie and Freddie? While the outcome of the conference and ultimate legislation may be uncertain, we can be sure of one thing; the banking and housing lobbies will have a powerful influence. And lawmakers, forever a slave to lobbyists’ wishes, will see that the special interests, not consumers, are protected. That’s the way politicians seem to work, and their record in protecting Main Street during this crisis has been nothing short of abysmal.
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John I do believe there is a future for Fannie and Freddie!
Michael - I do too, I just don't know what it will look like and whether or not consumers will benefit.
I don't think the question is whether there will be a Freddie or Fannie... It's a given that there will always be quasi government entities promoting and providing financing for housing in some way fashion or form. Whether they are called Freddie or Fannie may be up for debate however.
I think the real issue is what will mortgages look like once we make it to the other side of this current housing crisis. Even now in order to some extent create a bit of a softer landing in the current housing price crash there are still a lot of low down programs out there. These exist to some extent to essentially allow new buyers to take over where the old owners have failed, however requiring 20% down is really not an option for most buyers. Without requiring a larger down payment we are effectively replacing one persons credit with another persons credit in a down market many of whom will walk away as well. This is why most investors investing Mortgage Backed Securities will only invest in them if there is a Government Guarantee which means that every time a new owner defaults you and I as taxpayers are paying the bill.
Of course requiring larger down payments would take a large percentage of buyers out of the market which would force the more immediate decrease in housing prices which wouldn't be good for anyone as it could lead to larger bailouts of Fannie and Freddie and take a chunk of remaining home equity away from those who have worked so hard to pay down their loans or for that matter paid off their loans.
Without a doubt there will be additional monies like the $1.8 Billion recently requested.
The bailout of the housing market though necessary will create another large amount of National Debt beyond that which has already been spent.
Once the housing market finally bottoms out, it seems that some larger amount of money should be phased in over a number of years to insure that we don't go through a similar housing bubble again. The problem of course is that the bottom maybe a few years off yet... Which means we (collectively the USA) will likely be paying out another Trillion or two to keep the melt down from being to stressful all at once.
This is a disaster no matter how you look at it. Imagine the annual expense to the taxpayer even if only 1% fail! All built into the contract with F & F...
Glenn - Regardless of what they do with Fannie and Freddie, we're in for some "structural" changes in housing; and taxpayers will be on the hook for all the mistakes made in DC.
Jay - It's hard to imagine a positive scenario for taxpayers.
I've heard whispers of the federal legislators considering to pay 20% of outstanding mortgagaes for a big part of the population. Anyone else hearing that idea?
As much as we all wish to see a positive ending I don't see any signs this will be achieved. We are in too deep in order to see any positive results (not for a number of years).
I guess there will be some changes, my concern, will it be for the better. Before you argue they can't mess it up anymore, remember who we are talking about here. One thing I think I can probably pretty much bet on, it will cost the taxpayer.
I would advise folks who say "get rid of Fannie and Freddie", to be careful what you ask for. The laws of unintended consequences would have a field day if we suddenly found the real estate industry without a secondary market.
Having insurance doesn't make me feel easier . . . AIG
John, I think the absence of Fannie Mae and Freddie Mac would have an extremely adverse effect on mortgage financing. If we think financing is tough to get for some buyers now, get rid of Freddie and Fannie, and try it then. No. Keep them. Fix them, but keep them.
a Friend of my fathers who works on Wall St. believes the worst is yet to come with regards to the economy. And if the economy double dips, the housing industry will take a huge hit. In 2006 or 2007 he shifted all his assets into negative short term govt bonds. Basically he was paying 0.5% to the govt to keep his money safe.
As Dolly Lenz said last week on Your World with Neil Cavuto "We have only been putting off the pain" with all this spending and "bailouts"
I hope they are wrong, but they are also alot smarter than I am
And I read an interesting article from the UK this morning about how 'The American Dream is dead for Millions of Americans' and that we are seeing a shift in this countries demographics with basically an elimination of the middle class into the have's and have nots. hopefully they are wrong as well.
But in the end I have serious concerns going forward.
Going back to the original post, I thought I had heard that the GSE's are actually holding over 90% of all mortgages. Where is my misunderstanding. Because as bad as your picture is, this is even worse.
And thank you for showing what was the norm. That was always my question when pundits reported on how many were being held by the GSE's
We have to wean ourselves off of the government... and if we could create a structural change in taxation, it is possible that investment money could become available and attractive options would appear.
Kai - There are lots of rumors, but be assured that politicians will do what is in their best interests.
Carl & Ceil - DC is reluctant to take the politically damaging measures that would help.
Scott - That's the bottom line, I'm afraid.
Lenn - I agree, but don't think there's too much danger of them going away anytime soon.
Carla - Yes, the thoughts of all the risk are disturbing.
Carolyn - I have little faith that the fixes DC initiates will be much of an improvement.
Christa - I suspect govt. will be involved for a long time.
Daniel - I agree that we're far from the end of this crisis; the question is whether or not we'll ever get cooperation from our lawmakers.
Lane - And those in power are working to grow government, not shrink it.
And lawmakers, forever a slave to lobbyists’ wishes, will see that the special interests, not consumers, are protected
And this is why we need term limits on politicians and right now we need to weed out a lot of them and get some fresh faces who haven't been corrupted by inside the beltway life.
John,
When I read the title, the short answer is no. They are guilty of fraud in the grandest scale. In the present form they aren't viable.
The History of World Empires and The Track Record of Oppressive Bureaucratic Governments does not forsage a Happy Ending to our current economic crisis.
However, killing off FNMA and FHLMC would be a good start.
The cycle of the influence of lobbyists whereby govt officials go to work for lobbyists after the leave office (after a timeout period) and the influence of political donations by corporate interests for reelections will forever make this a pingpong match between competing rich and powerful interests. I view it as a football game where the ball moves a few yards each way, and some new plays are called, but the ball doesn't move relatively far, no game changers. Until there is a game changer and at the heart of the legislation is the protection of the working folk, monied interests will always find ways to exploit legal loopholes and increase the quarterly bottom line. Not all interests, but enough to wreak havoc with any financial system. I think it's the nature of the model, and from a fatalistic viewpoint, until a better model gets created, we'll see these things periodically, and they will be beyond painful.
As far as my opinion is concerned, there would a bit bad effect on mortgage business without the absence of these two.
Since they own 3/4 of the loans right now, it would be a disaster. They borrow from the Gov't and then use that money to pay the gov't back. It is a mess. Not surprising what the Wall Street guy said. We must stop ALL of this Gov't intervention.
Tuesaday is going to be a very interesting day. I have no clue what is going to happen but I am expecting the face of real estate to be different when we wake up Wednesday morning.
John:
From what I have been reading there are huge considerations that are being discussed with Freddie and Fannie. We still need them but I think they will have to be totally reworked and probably become privatized again.
Frank & Sharon - I agree completely!
Terry - And it will be interesting to see what the morph into.
Fred - Don't count on politicians doing away with any of the elements of their power.
Chris - I have to agree.
Susana - Without Fannie and Freddie or some form of them, the housing market would be changed dramatically, but I'm not sure that's a bad thing in the long term. Any transition would have to be gradual.
Missy - Yes, take them away and housing would collapse even further, but the current system is obviously broken.
Bryant - From what I've read, we'll not know what the ultimate decision is for months.
Claudette - Apparently everything is being discussed, but remember it's being discussed by those who have a vested interest in how it all turns out. I don't expect the taxpayer to see much benefit.
John, I guess "we the people" own a lot of notes, huh? Ugh.
I made a Facebook video in early 2009 noting the quick step march towards policies in our nation that our blatantly socialist. Naomi Wolf's read "The Facist Blueprint," highlights more accurately the finer points of a blueprint that's actually been implemented historically in several nations to acheive takeover.
I hear in your tone the distrust and skepticism towards honest dealing, and there's ample evidence for it. We need a call for leaders of character to step into civil government armed with more than just a law degree and political savvy, but knees that know how to bend before the Great Lawgiver, much like our fathers, and receive wisdom and honor to fight corruption.
The only thought that comes to mind after reading your quality post is....the government needs to get out of Real Estate related banking businesses and let it run itself....thank you John
I don't think we have seen anything yet on the loss with the bank or fanny and freddie
Considering they're critically involved with a vast majority of all residential Real Estate purchases....I don't see how they'd ever get shut down safely!!!
Most of the noise about dissolving them is just political football.
John - I always seem to be taking the contrarians postion, so I say 'Rip off the bandaid!'. After the mess the government has made out of this and all the lies and deceit in the agency that runs Fanny and Freddie I feel the private sector would run a secondary market much better...
Keith - After 4 decades in business and observing politicians in action, yes, I do have a lack of trust.
Richie - Long-term I agree, but I think it would be ill-advised to try to go "cold turkey."
Darryl - I think Fannie, Freddie, and FHA will leave us with lots of problems.
Mike - I agree that it's extremely unlikely that the GSEs will just go away.
Brent & Deb - As I stated above, I don't think a radical approach would benefit homeowners; in fact, prices would decline significantly and interest rates rise. Over the long haul, I could support such an approach, but think it would create too much chaos to do it quickly. (And I we did "rip off the bandaid, politicians would pick at the scab for years.)
John,
Removing Fannie and Freddie from the mortgage equation would require that the private sector would then take their place. Are they ready for that?
Esko - Quite honestly, I think housing would collapse if Fannie and Freddie were removed, but something must be done, just not overnight.