FireDream

Fannie and Freddie, Government Meddling, and the Celebrity Status of the Mortgage Industry

Fannie and Freddie.  You’ve probably heard their names so often lately that some might think that they’re the newest celebrity twins and are expecting to see their pictures on the cover of US Magazine.  Too bad that’s not the case.

A recent Reuters article gave a great explanation about Fannie and Freddie.  Here are some of the highlights: Fannie Mae, the Federal National Mortgage Association, was created in the late 1930s to spur homeownership.  Congress christened Freddie Mac, the Federal National Home Loan Mortgage Corp., in 1970 to further expand home financing options.  As explained in the Reuters article, the companies (which are owned by shareholders and traded on Wall Street) buy mortgage loans from lenders and repackage them as securities for investors.  Between the two, they are estimated to own or guarantee over $5 trillion in mortgage loans.

For the most part, Fannie and Freddie have largely flown under the radar, staying in the background and keeping the mortgage industry clicking.  But with the media-monickered “mortgage crisis” of the last year, they’ve moved to the forefront of consumer awareness.  Share prices fell due to investor concerns about market pressures.

In a controversial move, the U.S. House of Representatives have now voted on legislation that could provide up to $300 billion in assistance to homeowners and, as requested by Treasury Secretary Henry Paulsen, allows the Treasurey the opportunity to provide not only a line of credit to Fannie and Freddie, but also to buy stock in the two companies if push comes to shove.  President Bush, who has long said that he would veto such a bill, has now indicated that he will sign it if passed by the Senate.  When or if that will happen is unsure as Senate Republicans have indicated that they may filibuster the bill.

This bill is certainly a divisive one-not only in Congress, but also among Americans generally.  While no reasonable person wants to see Fannie, Freddie or the market fall further, government intervention and ownership in private companies is always a concern.  But what is most concerning to many folks is that the bill-which is estimated to cost taxpayers upward of $25 billion-doesn’t just stop with shoring up Fannie and Freddie.  Its provisions also include wide scale bailouts for homeowners at risk of foreclosures, funds for cities and states to buy and rehab foreclosed properties and permanently increase conforming loan limits, which were “temporarily” raised earlier this year.

Some friends of mine, who were discussing the bailout bill, were definitely not pleased with many of the provisions contained in its 700 pages.  They had the same response that others I’ve talked to have had: they bought a house well under what they qualified for, shopped around to find the best rate, and have lived conservatively so that they could make their mortgage payments.  Now, they say, they’ll not only be paying for their own housing, but also for the houses of peope who purchased homes significantly beyond their means.  They also question the wisdom of certain members of Congress-many of whom called on Fannie and Freddie several years ago to open the doors of homeownership to more Americans-whether or not, apparently-they could afford it.  These companies did as Congress asked, and now they seem to be struggling as a result.

In a free market economy such as our own, I’m not sure that this kind (and size) of bailout package has a place.  I believe strongly-as I’ve written many times before-that the market will rebound and home sales will climb again, with or without government intervention.  I guess time will tell.

What do you think?  Post your responses and let me know your opinion.  Who knows, maybe it’ll change mine.

This blog is intended for informational/entertainment purposes only and is not meant to provide any financial or legal advice.