Fannie Mae and Freddie Mac... What to do?
On June 3rd, Congress began meetings that are aimed at trying to figure out what to do with both Fannie Mae and Freddie Mac, the housing finance agencies that the government had to take over when their financial losses became overwhelming.
Both companies posted large first quarter losses, and have stated that if the housing market doesn’t improve, which it may be ready to, that they would have problems returning to profitability. Over $60 billion has already been spent in trying to keep these two companies afloat, and more will definitely be needed. It’s speculated that, if things don’t change, these companies could be under federal control for another four to five years.
There seem to be diverse directions that the restructuring of both of these companies could take, based on comments from many sources. As listed in this Reuters story, they include:
- Full nationalization
- Privatization with payment for insurance
- Cooperatives with loose government ties
- Utilities model
- Private mortgage companies
- Covered bonds
Paul Kanjorski, the representative from Pennsylvania who chairs the house committee overseeing this discussion, stated that all options will be considered in debate that has no expected timeframe for resolution. “This is not something that we should make sudden turns and changes on,” since Fannie Mae and Freddie Mac are “essential” to the housing recovery,” he said.
What is the big deal about these two companies? Basically, both companies do two things. One, they purchase loans from mortgage sellers, either giving them money or guarantees of payment to investors on mortgage-backed securities they issue. Or two, they offer security on mortgages from their own loan portfolios and sell them to investors in the secondary mortgage market, with a guarantee that the stated principal and interest payments will be passed through to the investor. This provides banks and other financial institutions with money so they can make new loans. In total, both companies own $5 trillion dollars in mortgages, half of all the mortgages in the United States.
Of course, another part of the issue the House has to deal with is how the markets will react to anything they come up with. Both of these companies have only been independent of the government for 40 years and have enjoyed robust trading, but if what happens with banking stock every time the government seems ready to step in occurs with these two companies, it could produce a negatively volatile situation with investors. If that happened, the only option the government would have would be to pull it back under governmental control; it doesn’t seem anyone wants that unless it’s a last resort.
For his part, President Obama wants both companies to succeed, as he sees a healthy Freddie Mac and Fannie Mae integral to his stimulus package towards helping to make refinancing more available. Banks have been hesitant to offer refinancing even to qualified candidates, and this would offer another option.
Therefore, the thrust would seem to be that both Fannie Mae and Freddie Mac find ways to be able to sustain themselves long term, even if they need government help right now. Only time will tell which decision the House committees end up recommending.
In my opinion, both Fannie Mae and Freddie Mac have too much control over modifying home loans for those who have found themselve upside down on their mortgages. I’d like to see less government interaction, and more done by the banks themselves…
I tend to agree with your statement, Gilbert Networking Groups, the banks are the ones who contributed heavily to this whole mess, I too would like to see more done to help their clients remain in their homes.