Fannie Mae (FNMA) and Freddie Mac (FRMC) are two of the largest Government Sponsored Enterprises (GSE) which the world would be better off without. Even as early as 2008, FNMA and FRMC were identified as being problematic. The Housing and Economic Recovery Act (HR 3221) was the first and in my opinion piss poor attempt at reeling in the madness of FNMA and FRMC.
Congress chartered Fannie Mae during the Great Depression in 1938 to help keep the mortgage market liquid; that is, to keep lenders actively providing mortgages. At that time, Fannie Mae ensured a supply of mortgage funds by purchasing mortgages from the Veterans Administration (VA) and Federal Housing Administration (FHA). This exchange enabled the VA and FHA to trade their existing loans for cash so that they could offer more home loans to potential homebuyers. In 1968, Congress split Fannie Mae into two companies: Ginnie Mae, which continued to buy government-issued loans and remained a government entity, and a new Fannie Mae that was part government entity, part private entity. This transition resulted in Fannie Mae’s status as a government-sponsored entity (GSE).
The government privatized Fannie Mae in order to reduce the budget deficit, which had been exacerbated due to the Vietnam War. By reorganizing Fannie as a publicly traded corporation, the government was able to remove Fannie’s debts from its balance sheet while allowing Fannie to continue promoting the government’s mission of homeownership. Congress allowed the new Fannie Mae to buy conventional mortgages, as opposed to only mortgages the government issued. Fannie was also able to issue mortgage-backed securities, which will be discussed in Section II.B. Fannie maintained a unique relationship with the government due to its previous position as a wholly public institution. For example, it had a line of credit with the U.S. Treasury and the President was authorized to appoint five members of Fannie’s board of directors. These features blurred the line between a government entity and a private corporation.
In 1970, shortly after Congress reorganized Fannie Mae, it chartered Freddie Mac to buy up mortgages under the Federal Home Loan Bank Board, allowing these institutions to make more mortgages. In 1989, Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act, which dissolved the Federal Home Loan Bank Board and put in place a shareholder-elected board of directors for Freddie Mac, making it a publicly traded company. This gave Freddie Mac GSE status. Throughout this Paper, GSEs will refer exclusively to Fannie Mae and Freddie Mac.
In 1991, Congress began developing a regulatory scheme to oversee the GSEs. It created the Office of Federal Housing Enterprise Oversight (OFHEO), which was a subsection of the Department of Housing and Urban Development (HUD) and was succeeded by the Federal Housing Finance Agency (FHFA) in 2008. When Congress created the OFHEO, it also amended the GSEs’ charters to include an affordable housing “mission.” In 1999, for example, the GSEs reached an agreement with HUD that by 2001, half of the mortgages they guaranteed would be made to low-income borrowers. As discussed below, this affordable housing mandate contributed to the GSEs’ demise.
A federal agency looked on as the GSEs implemented lower underwriting standards. The Office of Federal Housing Enterprise Oversight (OFHEO) was charged with overseeing the GSEs and was aware of the GSEs’ risky practices. However, it determined that their purchases of risky mortgages and MBSs did not warrant concern. As a matter of fact, OFHEO routinely noted the increased exposure of the GSEs to subprime default risk, but it never did anything to address it. Rather, its examinations of the GSEs regularly concluded that they both had sufficient capital and prudent credit-risk management. One reason that OFHEO was unable to effectively regulate the GSEs was because GSE executives negotiated with Congress so that the agency was subject to the appropriations process. This meant that the OFHEO’s budget was subject to the will of politicians who the GSEs were able to manipulate with their lobbying tactics. According to one Freddie Mac lobbyist, OFHEO could either “appease Fannie and Freddie or get reamed in the budget.” Therefore, it is not surprising that OFHEO was a weak regulator.
President Barack Obama recently announced the nomination of Representative Mel Watt (D-N.C.) to replace the current FHFA acting director — who despite controlling entities that influence over 20 percent of the economy — was neither appointed by the president nor confirmed by Congress. While this change could eventually lead to funding the Trust Fund, the confirmation process remains uncertain, and action is long overdue.
What is scary is that FNMA and FRMC are insuring well over $1.1 TRILLION DOLLARS of questionable loans right now. This is FAR more than at anytime during the financial crisis that put us here. The cold reality is that just because you are of a certain color or live in a certain area does not mean that I, as a taxpayer, need to be underwriting your risk. At the end of the day the entire Federal Housing Administration (FHA) should be scraped; either your can afford to buy a home or you cannot.
President Obama’s comments yesterday are merely window dressing to that which Congress demanded almost 5 years ago. Senator Bod Corker, a Republican whom represents us here in Tennessee, teamed up with Senator Mark Warner a Democrat from Virginia to bring forward a 154 page Bill back in June, 2013.
Republicans and Democrats have begun work on a bipartisan bill that would replace Fannie and Freddie within five years with a new “public guarantor” as part of a broader framework designed to wean the government back from its outsized role backstopping the nation’s $10 trillion mortgage market.
At the end of the day the loss of FNMA and FRMC means little to the average Contractor in the field.
The bill would allow private entities to purchase an explicit government guarantee to cover catastrophic losses on mortgages issued as bonds from a new guarantor, called the Federal Mortgage Insurance Corp. But the new issuers would first have to raise a significant amount of capital that would take all losses before the federal guarantee would be triggered. The new “FMIC” would oversee the broader market, much as the Federal Deposit Insurance Corp. regulates banks and provides deposit insurance to minimize bank runs.
The preservation work, by in large, will continue to dwindle along with the financial institutions bringing back in house both the Asset Management (AM) side which they already have begun along with the Field Service Management (FSM) or preservation side which they are somewhat doing anyway. At the end of the day the removal of FNMA and FRMC is one of the best things which could ever occur for the US Taxpayer. The US Government should have never become a part of financing and insuring mortgages in the first place; once politicized, the entire mess under Barney Frank whom is both openly gay and intimated that he is both a pot smoker and an atheist, became the debacle which we are cleaning up today. The reality is that people whom pick up their welfare checks on the way to the Emergency Room for prescriptions are not exactly the type of responsible folks whom are capable of paying 30 years upon a mortgage.