Fannie Mae (FNM) and Freddie Mac (FRE) are two of the most hated agencies on Wall Street. These quasi government agencies are blamed for much of the problems related to the housing crisis. They are criticized for backing risky loans and encouraging an environment of risk taking by guaranteeing liar loans. Many politicians and citizens have even called for the abolishment of both agencies. Although Freddie Mac and Fannie Mae may be terrible investments, they are a necessary cog in our economy.
Fannie Mae and Freddie Mac play a crucial role in our economy. They provide guarantees for most of the housing loans that are given to individuals for real estate purchases.
Here are a few reasons why these agencies are necessary evils.
Without these two agencies, homeowners would find it nearly impossible to get a loan. Banks would only lend money to individuals with excellent credit. This doesn’t mean that people with bad credit should get home loans but individuals with good credit should have access to funding. Banks would not take the risk of lending to individuals with good credit without federal backing.
There would be no more long-term mortgages. Lenders would not grant 20 or 30 year mortgages to borrowers. Loans would be much shorter in term length. Banks look to make a quick profit and would not tie up their funds for such a long period of time. For example, a 10 to 15 year loan would be favorable financially to borrowers over the long run but would constrict the number of borrowers looking to borrow.
These two agencies have actually helped bail out the banks indirectly. The billions that have been pumped into Fannie and Freddie have been paid out to cover losses on mortgages granted to national and international banks. The banks would have been sunk if Fannie and Freddie had gone under. The $150 billion dollars in taxpayer bailouts will never be repaid but has helped to stabilize the United States economy. The entire mortgage market would dry out without the government aid.
What do you think should be done with Fannie and Freddie?
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I think the slot machines are an appropriate picture for this article and for Fannie and Freddie in general. Your boy Buffett was smart enough to bail on them when they lost their way and became way too risky. Let’s face it, they are nothing but monumental failures to the social engineering schemes that were dictated by the politicians on Capital Hill.
As a wise man once said: ” Policymakers assure us that the next generation of government housing programs will be “carefully designed” (bring on the next five-year plan, Comrade!). But the real question is why the government should be doing anything to promote homeownership.”
An even wiser man said: “A private secondary market for prime mortgages should have been a natural market development. Why did it never develop? The answer is obvious: no private entity could compete, or can now compete, with the government-granted advantages, and now the huge explicit subsidies, of the GSEs. There can be no evolution of a private prime mortgage loan market while the GSEs make private competition impossible. The core issue about GSEs is this: You can be a private company, with market discipline; or you can be part of the government, with government discipline. But you can’t be both.”
In short, both Fannie and Freddie need to split into good bank, bad bank. Wind down the bad back with all the bad loans, and fully privatize the good bad to keep the politicians from continuing to use these entities for their own short-sited political purposes.
I like the good bank bad bank idea. The question would be, who would take all of the bad loans? The government’s balance sheet is already overextended.
Government created the mess and they are going to have to clean it up. These companies are even worse than AIG in terms of losses. We need government out of the mortgage business and we need a healthy non-government sponsored securitization market, governed by financial discipline rather than political wishes.
Completely false. If we did not have Fannie Mae and Freddie Mac, housing prices would come crashing down precisely because people would not be able to buy 30-year mortgages guaranteed by the federal government for an oversized and overpriced home.
Who would subsidize mortgages?