Fannie Mae (Federal National Mortgage Association) was created in 1938 by Congress to help Americans become homeowners, spreading the middle class dream down the food chain. A second company, Freddie Mac (Federal Home Loan Mortgage Corporation), was created by act of Congress in 1970 to add a touch of competition in the marketplace (Fannie is larger), and they were both focused on encouraging investors to provide capital for mortgage loans and guarantees. Both companies were eventually traded on the New York Stock Exchange. Over the years, they have been provided with federal subsidies and even direct access to Federal Reserve funds. “‘Our business is the American dream of home ownership,’ Fannie Mae declared in its mission statement, and in 2001 the company set a target of helping to create six million new homeowners by 2014. New York Times (June 19th). In the first quarter of 2010, these two behemoths took over a foreclosed home every minute and a half, 163,828 units or enough houses for a reasonably large city.
Remember the housing boom? Yeah, that one! These companies did their job way too well, letting folks who shouldn’t have borrowed and bought their houses on slim economic assumptions, and by 2008, they accounted for half of the $12 trillion U.S. residential mortgage market… oh, and I forgot to mention, they made lots of campaign contributions along the way. Ooooops! The trickle of mortgage defaults became a raging flood. The Federal Housing Finance Agency took over both companies on September 7, 2008 and placed them under conservatorship; the feds wound up owning almost 80% of the stock. These companies were recently delisted from the NYSE, and it may well be the U.S. taxpayers who are now stuck with the burden of that takeover: “For all the focus on the historic federal rescue of the banking industry, it is the government ’s decision to seize Fannie Mae and Freddie Mac in September 2008 that is likely to cost taxpayers the most money. So far the tab stands at $145.9 billion, and it grows [every day]. The Congressional Budget Office predicts that the final bill could reach $389 billion.
“Fannie and Freddie increased American home ownership over the last half-century by persuading investors to provide money for mortgage loans. The sales pitch amounted to a money-back guarantee: If borrowers defaulted, the companies promised to repay the investors… Rather than actually making loans, the two companies — Fannie older and larger, Freddie created to provide competition — bought loans from banks and other originators, providing money for more lending and helping to hold down interest rates.” The Times.
The potential of a federal bailout of these two structures is a political hot potato that is likely to be one of the many campaign issues in the upcoming mid-term elections. You see, things didn’t exactly work out as planned: “As [Fannie and Freddie] defaults mounted, the companies quickly ran low on money to honor their guarantees. The federal government, fearing that investors would stop providing money for new loans, placed the companies in conservatorship and took a 79.9 percent ownership stake, adding its own guarantee that investors would be repaid… The huge and continually rising cost of that decision has spurred national debate about federal subsidies for mortgage lending. Republicans want to sever ties with Fannie and Freddie once the crisis abates. The Obama administration and Congressional Democrats have insisted on postponing the argument until after the midterm elections.
“In the meantime, Fannie and Freddie are, at public expense, removing owners who cannot afford their homes, reselling the houses at much lower prices and financing mortgage loans for the new owners.” Yeah, the old “buy high and sell low” routine… hmmmm. We know where that is going. Sometimes, don’t ya just want to demolish it all and just start over? With genuine credit scarce (take away Freddie and Fannie and see where the housing market would be) and the federal tax credit for first time homebuyers gone, the real estate market is beginning to look more like a Mexican morgue. And without an active market, the prices that Freddie and Fannie are likely to get for the foreseeable future… well, does “dismal” sound about right ? As the late Gilda Radner’s Rosanne Rosannadanna character on Saturday Night Live once said (for those old enough to remember): “Well it just goes to show you, it’s always something, you either got a toenail in your hamburger or toilet paper clinging to your shoe.”
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