As many of you are aware, over the past several years, we have seen many changes and transitions within the mortgage industry and there is still a carryover from the mortgage crisis in 2008. The market has shifted from away from the wall street investors which was the main contributing factor to the crisis, so now we are left with Fannie Mae and Freddie Mac, which purchase half of the mortgages issued by lenders in the United States.
In September 2008, after the two institutions suffered billions of dollars in losses, the Federal Government created the Federal Housing Finance Agency, which placed both organizations into conservatorship. US taxpayers have backstopped the two institutions and their mortgage securities ever since. Over the years, there has been much debate as to whether or not to restructure both or eliminate them. Of course the idea of elimination was not a viable option. At the time of discussion was purely political, another well thought out idea from the DC establishment. Let’s just put this into perspective and see why the elimination of Fannie Mae and Freddie Mac is absurd.
First, both organizations were created to create liquidity for banks wanting to lend in the 1-4 unit arena. Fannie Mae was created in the mid 1930’s and Freddie Mac later in the 70’s. Over the years, they have both grown and are among the largest financial institutions in the world. The big question is who would fill the void; the large banks? It’s a totally preposterous idea! Beginning in 2016, both Fannie Mae and Freddie Mac will ramp up sales of a new type of security that will transfer most of the cost defaults to private investors. These crisis era tools are designed to reduce their exposure to mortgage losses and spark a new market for financing homebuyers. These new securities could ultimately help reduce the government’s roll by persuading investors to take the risk on the default. Currently, the US housing market relies entirely on guarantees from Fannie Mae and Freddie Mac or other government backed entities. These companies, along with government agency, Ginnie Mae, backed most mortgages and issued 96% of all the mortgage bonds in the first 10 months of 2015. This all being said, Fannie Mae and Freddie Mac are here to stay and I am confident we will continue to see re-structuring of both organization’s in the future to prevent another mortgage crisis.
Written by: Stephen Bighaus