Reasons Freddie Mac and Fannie Mae Will Never Disappear

Washington Should Wind Down These Government-Subsidized Mortgage Goliaths

By Gene Wright

The federal backed mortgage outfit may have possibly been the culprits for worsening lending standards that lent a hand in the housing bust, although without them, scarcely anyone could purchase a home today.

Their failures are apparent, while politicians wearing every sort of stripe seem to disparage them. In retrospect Fannie and Freddie were the largest catastrophes from the financial meltdown of 2008. Already the government has used up over $130 billion of taxpayer monies to keep them afloat, while the numbers are still going up.

If in any way they were expendable, these two mortgage giants would have gone by the wayside by now. However the credit crisis of the past three years has made prospective middle-class home purchasers more reliant on Freddie and Fannie than ever before. The two colossal agencies' main purpose is to buy bank mortgages and move them into saleable securities, an advantage to homebuyers by keeping interest rates somewhat reduced and providing banks a stronger lending incentive. A huge byproduct is the fixed-rate 30-year mortgage, which the majority of banks couldn't offer without having the government backing, due to the likelihood of losing money being greater. Freddie and Fannie effectively lower the lending risk, providing more eligibility for people to obtain loans and consequently, homeownership.

Anyway, that's the theory, however something obviously went bad wrong. During the big housing boom, of 2006-2008 many lenders, including Freddie and Fannie reduced their lending requirements to assist millions of homebuyers who wanted to get in on the booming housing market, although normally would not have been qualified for a mortgage loan. This resulted in hundreds of thousands of bad loans which became an epic housing seizure that's now into year five, with home prices now off over 30% from the crest of 2006, and home prices are still falling. All of this directly led to the financial catastrophe that exploded in 2008, after Freddie and Fannie went bankrupt and were acquired by the government.

An informative book, Serving Two Masters, Yet Out of Control: Freddie & Fannie - After making an attempt to be the servant of two different entities, Fannie and Freddie have become literally without control. Would making them totally privately held fix this quandary of being both public and private? If not, are there other options available? In eleven different essays, economists, public figures, and government officials look into these favorable positions that have permitted these two agencies to expand to unparalleled size, realize such extraordinary profitability, and acquire unprecedented pressure over the political arena.

Representative John Boehner, House Speaker discussed the option that Washington should wind down these government-subsidized mortgage Goliaths Freddie Mac and Fannie Mae. Now the irony is that Freddie and Fannie are now keeping the housing marketplace afloat. Nearly every mortgage written today is backed by Freddie, Fannie, or FHA, a drastic increase from traditional times when local banks and lenders conducted a minimum of 20% of the home loans without any government assistance. Another way of saying that without the government, hardly anyone would have the ability to purchase a home in today's market. However the private mortgage marketplace should resume as the general economy gets better. However as badly as lawmakers may wish to wind Freddie and Fannie down, it's apparent that abruptly doing so would further depress the housing market and trigger a larger recession. New Article Sep. 3, 2011

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