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Archive for Wednesday, September 10, 2008

Fannie, Freddie still important mortgage players

September 10, 2008

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As soon as I heard about the federal government's takeover of Fannie Mae and Freddie Mac, I began wondering what this will mean for homeowners long-term.

First, to fully understand the importance of these two companies and their bailout, you have to appreciate how they helped millions of people become homeowners.

Fannie and Freddie don't directly lend money to individuals. Instead, they were created to establish a regular flow of money to lenders who actually make home loans. The institutions buy loans from mortgage lenders - commercial banks, savings institutions and credit unions - and that in turn allows those institutions to make additional home loans.

Fannie Mae was created in 1938 during the administration of President Franklin D. Roosevelt, when millions of families couldn't afford to buy a home. Freddie Mac came along 32 years later.

The two institutions were chartered by Congress as government-sponsored enterprises, or GSEs, and had an implicit guarantee from the government that they would not fail. Now we see that the implicit guarantee has become an actual guarantee.

In 2007, the two companies reported a combined loss of just under $5.2 billion, according to a congressional report. Until then, they had not reported a combined loss since 1982.

To prevent a crushing blow to the housing market, the federal government stepped in to bail the companies out.

Next steps

So what now?

Well, weep if you own stock in the company - either in an individual portfolio or, for many investors, in a mutual fund. But of course you've probably already been crying or cussing if you knew you held the stock in these two companies.

Fannie Mae's stock has steadily declined from a 52-week high of $68.60 to a close of just 73 cents on Monday, the day after the Treasury Department announced the federal bailout. It's been a similar bungee drop for Freddie Mac, whose 52-week high was $65.88. The stock closed on Monday at 88 cents.

Fannie and Freddie's financial problems don't pose a risk if you aren't planning to sell your home anytime soon or you don't want to refinance. That's because you don't have to worry about mortgage rates. And the bailout doesn't affect your existing mortgage, so you should continue to pay it as agreed.

However, if you're in the market to buy, or need to refinance, you may find rates slightly lower because of news that the two institutions have been rescued.

But the larger question is: Should Fannie and Freddie continue to exist at all?

Absolutely, says economist James K. Galbraith, the Lloyd M. Bentsen Jr. chairman in government and business relations at the University of Texas.

The government bailout is a good thing, said Galbraith, the author of "The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too."

"It's hard to see how it could have been avoided," Galbraith said in an interview. "These institutions created American homeownership as we know it. They created a flow of money to the housing market. All of us who are homeowners will be high and dry if this function gets taken away."

Roles may change

In announcing the takeover of Fannie and Freddie, Treasury Secretary Henry Paulson said it was necessary to continue "supporting the availability of mortgage finance."

But there are those who think the bailout should be a prelude to a reduced role of both Fannie and Freddie in the supply of mortgage money.

Radhakrishnan Gopalan, assistant professor of finance at Washington University in St. Louis, said that in the long term, he sees a significantly diminished role for Fannie and Freddie.

"When they were established, the market was not doing a good enough job of making homeownership available to the common man at a reasonable price," Gopalan said. "Liquidity has increased. And think about it. The root cause of the current crisis is that mortgages were too easily available to many people who shouldn't have gotten them."

"The ideal option would be to gradually downsize them, limit their activity to only those sectors where there is a genuine need for government support for mortgage finance and let the private sector take over the financing of most mortgages," he said.

Gopalan believes the capital markets are "sufficiently well developed to make mortgages cheap and accessible."

My concern is we don't really know what the market will do without a Fannie and a Freddie. We do know that there are too many areas of the country where the working class can't afford to buy.

If the prices of mortgages rise significantly in the absence of Fannie and Freddie, we may return to a time when only the financially well-heeled can afford to buy a home.

With homeownership such a key part of people's net worth, I'm not sure we can afford to eliminate or smack down Fannie and Freddie's role in the housing market.

Comments

bondmen 5 years, 7 months ago

We've already investigated SandyMorgan and here's the bad news for Democrats up to their eyeballs in contributions from the failed Fannie and Freddie:http://www.opensecrets.org/news/2008/07/top-senate-recipients-of-fanni.html

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SandyMorgan 5 years, 7 months ago

bondmen, just wait, we'll investigate McCain/freddie soon.

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bondmen 5 years, 7 months ago

Spare me JohnBrown, your McCain mind reading failed to mention Barry Obama is a top recipient of Fannie Mae/Freddie Mac contributions:http://www.opensecrets.org/news/2008/09/congressmen-may-have-lost-17-m.htmlAnd your Democrats control CONgress - why are they awol too on shutting down the government funded real estate losses?

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JohnBrown 5 years, 7 months ago

The fake outrage of McCain and Palin at the influence of Fannie Mae and Freddie Mac lobbyists and Congress' inaction is pure irony. Twenty (20!) of McCain's fundraisers have lobbied for Fannie and Freddie. Rick Davis, McCain's campaign manager served as president of an advocacy group led by Fannie Mae and Freddie Mac that worked to cripple regulatory initiatives in Congress because the two institutions feared that "Congressional meddling would lower their healthy profits.""Pay no attention to that man behind the curtain!"

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bondmen 5 years, 7 months ago

This is just the first in a long list to come of FDR era New Deal/Great Society programs to be reorganized and restructured. By nature government programs have no financial controls or stop loss provisions limiting the promises and ultimately the damage as the taxpayer checkbook gets ripped open ever wider to pay the final bills.Look at the list of big shot, little mind politicians and policy wonks who populate the Boards of Directors of Fannie and Freddie. Old politicians never die, they just find some quasi governmental organization to leech off of and run up a $5 trillion tab to the taxpayers.Unfortunately the Socialists in Washington District of Corruption bailed out millionaire and billionaire investors who took the risk of owning these higher yielding, risky securities and the US taxpayers get stuck with the bill. Looks like that means our home mortgage expense just got bumped up big time and these quasi governmental institutions failed at their goal of making home ownership cheaper for US citizens!http://globaleconomicanalysis.blogspot.com/2008/09/roubini-misses-boat-on-regulation.html

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