BluefoxToday blog : Fannie Mae and Freddie Mac on the ropes

Fannie Mae and Freddie Mac on the ropes

The two mortgage heavyweights have been the backbone of U.S. housing finance scene for decades and have provided the intended liquidity to the market. This in turn allowed more people to buy a home to live in, the ultimate goal of the system. Then in the early 2000's the real estate market grew hot, piping-hot in select states like California, Florida, Nevada and Arizona, and as history suggests all out-of-control booms come to a crashing halt sooner or later. Like now. To fuel the boom, mortgage lenders, large and small, jumped head first on the housing bandwagon to make enormous amounts of money with fancy loan products. The activity during these years was fast and furious wherever one looked.

As things were unfolding. Fannie and Freddie were watching all of this from the sideline and eventually the desire to increase their profits overruled prudence and they joined in on the feast. To make a long story short, now they are grappling with heavy losses, just like most banks are, from these boom-time loans and are nearly insolvent.

Washington and think tanks and others in the know are presently debating what to do with these bleeding mortgage players. Obviously they need to be restructured in some way to keep this from happening again. A few experts call for their nationalization, some suggest they should be sold in pieces and some would reduce their role in the vast mortgage finance system.

Whatever is decided, it should happen after the markets have returned to some kind of normalcy. If something is done now, as some experts suggest, it would just add to the credit scene volatility, causing more harm and prolong the long-anticipated recovery.

Moreover, the GSE, or Government Sponsored Enterprise, setup did work for a long time. The current turmoil is then clearly the responsibility of Fannie's and Freddie's boom-time leadership who were more influenced by profit prospects than following the mandates each institution had. And where were the federal regulators tasked with overseeing them? There were a few warning voices heard in Washington early in the decade but they were quickly shouted down and the show, unfortunately, went on.

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Provided by: 

Esko Kiuru
Mortgage, real estate and apartment industry analyst 

www.BluefoxToday.com - syndicated mortgage, housing and property management blog

eskokiuru@gmail.com
My cell: 702-499-1006

Comment balloon 13 commentsEsko Kiuru • August 19 2008 10:56PM

Comments

Esko,

Good post. Gives a clear idea of what was not supposed to happen, but happened anyway. often people blame private companies for being greedy. Fannie Mae and Freddie Mac are not actually private, they are so called Congress Chartered Corporations, whic makes them quasi govermental institutions, at least that was my understanding

Posted by Jon Zolsky, Daytona Beach, FL, Buy Daytona condos for heavenly good prices (Daytona Condo Realty, 386-405-4408) about 10 years ago

   You wrote a very good post.   As a mortgage person for over 20 years, this is one of those epic times when many things came together at once.  FNMA, FHLMC certainly made mistakes, but there are so many factors that went into the situation were in currently: lenders who took advantage of the system, borrowers who did the same, Wall Street ratings agencies that didn't tell the truth about the loans that were securitized, Wall Street brokers who knew what they were selling was toxic, and government officials who "kicked the can" down the street for many years (we finally ran out of street). 

   The scary part is that we are looking for the same "leaders" that oversaw this catastrophe to get us out of this predicament.  I hope that true "leaders" step out of the pack to help solve the situation.  Going down the same road isn't going to work.  Like I said, we ran out of road. 

Posted by Tom Ash (Agentspayingforward.com) about 10 years ago

I always like to look at the sunny side of the street so to speak, but with the Fannie Mae/Freddie mac debacle - I can't seem to find it!  I fear things will gt better before they get worse. Any predeictions?

Posted by June Stark, Las Vegas Condos & Luxury Homes Expert (Elite Realty-Luxury Homes & Condos On & Off the Strip) almost 10 years ago

Esko, the abuse of anything will always have negative effects in the end no matter how big and powerful the entity.  Fannie and Freddie are living proofs of that.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) almost 10 years ago

Jon,

Fannie and Freddie leaders were enticed by the money banks were making, so they had to join the frenzy.

Posted by Esko Kiuru almost 10 years ago

Tom,

All market participants bear some responsibility for the current mess.

Posted by Esko Kiuru almost 10 years ago

June,

Fannie and Freddie aren't out of the weeds yet, so we'll see.

Posted by Esko Kiuru almost 10 years ago

George,

The marketplace can be brutal if you keep abusing it long enough.

Posted by Esko Kiuru almost 10 years ago

Esko,

I cannot think of much that bothers me more that Fannie and Freddie purchasing these loans so far outside their underwriting guidelines.

It shocked me when I learned of this fact. It was reading one of your posts that prompted me to research a little into this gross mistake.

I can imagine what they were thinking, I just cannot believe that they did it, in total violation of the charters as far as I can figure. Reading their justifications at the time of the decision, they sound so smug.

I keep expecting to see some ramifications against those who made this decision.

And you are right, where were the regulators and Congress?

I think they were wallowing in lobby money.

Richard

Posted by Richard Byron Smith, NMLS #184479, Mortgage Loan Officer (Mortgage Loan Officer, Fairway Independent Mortgage Corporation NMLS #2289) almost 10 years ago

Richard,

Lack of oversight played a big role in that.

Posted by Esko Kiuru almost 10 years ago

Esko--- The failure of these titans, and it now feels inevitable, will mean that the government will likely soon have a hand in nearly every home loan in this country.  

Our business practices and who can be in it are about to dramatically change beyond anything we have seen so far.

Posted by Aaron Gordon, Home Loan Consultant - Las Vegas, NV (Branch Manager) almost 10 years ago

Aaron,

Major changes are likely to come, that's pretty much set, especially if those two big boys fail.

Posted by Esko Kiuru almost 10 years ago
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