|Fannie and Freddie, Can They Please Go Away?||December 2015|
Without The Federal National Mortgage Association (FNMA), or Fannie Mae, and the Federal Home Loan Mortgage Corporation (FHLM), or Freddie Mac, we might not have conforming loans. They’re the government-subsidized entities (GSEs) that set the annual conforming loan limits and help a wide range of people become homeowners by purchasing bundles of loans that may have lower credit score requirements or lower down payments.
So why is the federal government committing to abolishing them? Is it time for them to go? Would we even have the option of 30-year fixed-rate mortgages without them? It’s hard to speculate what the market would look like if they were gone, as they’ve been around for decades.
Why It’s Not Crazy to Want Them to Die
Both Freddie and Fannie were considered so important that they became “too big to fail” — until, of course, they did fail.
In 2008 the U.S. government took Fannie and Freddie over, effectively “bailing them out” of the multibillion-dollar losses they incurred when the U.S. housing market took a nosedive. By lowering standards and chasing profits, Fannie and Freddie took a lot of risks that ultimately led to the government takeover and the need for tax monies to shore them up. Our tax monies. That means your tax monies. Grr. But if they're private companies, why do we get left holding the bag?
Put simply, Fannie and Freddie always win. In good times, they enjoy huge profits, passed on to the private shareholders. But in bad times, unlike other private companies, the GSEs enjoy the financial support — some would say bailout — of the nations’ taxpayers.
Why You Should Desperately Hope They Survive
Because they support higher levels of homeownership. Originally, Fannie Mae was run by the federal government, purchasing FHA loans from private lenders and pumping funds into the mortgage market so more Americans could buy homes. Eventually Fannie became a fully private, for-profit business. In 1968 the Department of Housing and Urban Development began to regulate Fannie Mae, and imposed requirements that a percentage of mortgages be devoted to low- and moderate-income housing purchases. Two years later Freddie Mac was created to provide the same support for thrifts.
There has been much debate over the need for and the legitimacy of the two GSEs, despite the fact that they are now not only profitable but have fully repaid the monies that bailed them out. Together they back about 60 percent of new mortgages, which adds up to more than $5 trillion.
In 2014, the Senate Banking Committee approved a measure to abolish Fannie and Freddie. But is that really the right thing to do? Homeownership in America is at the lowest level in nearly 50 years. Credit ratings have suffered considerably for many people, making it more difficult for them to qualify for traditional mortgages from private lenders. Affordable housing is already becoming scarcer, and as affordability decreases, the lack of affordable mortgages would mean fewer low- and middle-income buyers, which in turn would lead to home prices dropping and possibly another housing crisis.
There’s no definitive answer to the GSE controversy. However, if you’d like to learn more, or to discuss the impact that the elimination of Fannie and Freddie could make on you directly, I’d be glad to set up a time to talk. I look forward to hearing from you!