After the credit implosion and housing market collapse in 2008, Fannie Mae and Freddie Mac experienced huge losses, mostly caused by their sub-prime mortgage holdings. These losses, totaling almost $188 billion, necessitated a taxpayer funded bailout of both entities. Since then, Congress and the White House have been contemplating ways to reduce their roles in order to avoid another future housing meltdown with taxpayers left holding the bag.
Fannie Mae and Freddie Mac buy mortgages from lenders and package them into pools of securities on which they guarantee payments of principal and interest. These government-sponsored entities have functioned profitably and efficiently for decades (Fannie since the 1930’s and Freddie since 1971), until the federal government encouraged (even required) them to take on more and more risk by lending to lesser-qualified borrowers in the 1990’s and 2000’s.
While these losses almost bankrupted both Fannie and Freddie, 2012 brought a surprising turn of events! Both entities just announced record profits in 2012, with Fannie reporting the largest annual income in the company’s history! In fact, both entities report they expect profits to continue.
Fannie and Freddie have drawn $187.5 billion in Treasury aid since they were taken into conservatorship in 2008. However, they’ve sent back $65.2 billion in dividends, which count as a return on the government’s investment and not as a repayment. With Fannie and Freddie once again profitable and within the next few years likely to pay back ALL funds used to bail them out, it’s become increasingly difficult to argue for their demise.
Thus-far, Congress and the White House have taken only baby steps towards housing finance reform. While proposals for overhauling mortgage finance have ranged from abolishing Fannie and Freddie to keeping them intact, all plans under discussion hope to accomplish the same goal: minimize future taxpayer risk by decreasing government’s role and increasing private sector participation. It’s desired that private capital take the predominant loss risk, with only a limited government guarantee. However, protecting the U.S. Treasury will come at the cost of higher mortgage rates for borrowers. Borrowers will ultimately pay ever-increasing “guarantee fees” that are built into borrowers’ mortgage rates.
Armando Falcon, the former Director of the Office of Federal Housing Enterprise Oversight (from 1999-2005), has voiced his support for a new securities platform that would essentially consolidate and replace Fannie and Freddie.
Meanwhile, Senators Mark Warner (D – Virginia) and Elizabeth Warren (D – Massachusetts) are working with Senate Republicans, including Bob Corker of Tennessee, to craft bipartisan legislation for a housing finance overhaul. Said Warner, a bill could be introduced by this summer.
Warren Goldberg is President of Mortgage Wealth Advisors, a Certified Mortgage Planning Specialist®, and a published author. His interviews include Blog-Talk Radio, Newsday, and the Long Island Herald. Since 1992, he’s been sharing his financial knowledge and wealth-building strategies, including how to properly use your mortgage as a financial tool. His clients regularly express their trust and appreciation by recommending friends and family call when in need of mortgage, real estate, and financial guidance.