Fannie Mae & Freddie Mac

Bill in Brief

Before the housing market started trembling, Congress was looking at ways to tame Fannie Mae and Freddie Mac, the "government sponsored" companies that have fueled the housing market, but which - some have long feared - were on fiscally shaky ground. This year, things got even shakier - with Fannie and Freddie first becoming part of the rescue posse to help prop up defaulting mortgages - and then later with the weak housing market sending both lenders into financial free-fall.

In '08, partly as part of a giant housing bill passed in July, Congress and the administration ended up doing three things: setting tighter regulatory reins onto the two companies; at the same time loosening the leash on the mortgages they can cover; finally, allowing the Fed broad scope to shore up the companies' finances through loans and direct investment.

Finally, in September, the Fed just decided to take control of the two mortgage giants, placing them under "conservatorship" and booting their CEOs. That status is seen as temporary, giving the markets enough confidence in the companies until a permanent solution is figured out (most likely under the next president). The Fed said it'll prop up the companies with quarterly investments on an as-need basis, but later wowed the mortgage markets by buying up $600 billion of Freddie's and Fannie's assets in an attempt to bring down mortgage rates. As part of yet another early '09 plan to rescue the housing market by bolstering confidence in the mortgage backers, the Obama administration announced it'll double it's financial commitment  by covering  up to $400 billion in the companies' losses (NYT, WP, WP, LAT, WSJ, WP, WP)

What are Fannie and Freddie?

Though most homemakers probably have never heard of Fannie and Freddie, these two "government sponsored entities" - or GSEs - are thought to play a large part in America's boom in homeownership.

Set up by the government - but run privately - GSEs have been in the business of backing mortgages since 1968. Like any re-insurer that backs up loans, they make it easier for banks to issue riskier mortgages at lower rates. That means more mortgages for more families. Today Frannie and Freddie either own or back up 41% of home mortgages (Congress Daily).

What's the fuss?

In 2003, both Fannie Mae and Freddie Mac found themselves in hot water when the feds accused them of improper accounting - in the $9 billion range. This led to the resignation of both the chief executive of Fannie Mae, Franklin Raines, and chief financial officer of Freddie Mac, Timothy Howard.

As if that financial hanky-panky wasn't enough to worry lawmakers, some economists warn that Fannie and Freddie deserve special attention because of the shaky ground they sit on. Here's the idea: those economists say Frannie and Freddie do as well as they do because, although they're not government agencies, the market treats them like they're part of the government. Everyone knows that if Frannie and Freddie crumble, the feds will bail them out. That makes it safer to dole out riskier mortgages - but it also creates a mini housing bubble of sorts. In other words, the feds will probably rescue Fannie and Freddie if they crash, but knowing that the feds will do so increases the chances of creating a market bubble that will make them crash. (See this Washington Post article for more on their unique status and risk.)

To make sure Freddie and Fannie didn't go the way of Savings & Loans (the 80's Enron, which got bailed out by the feds), lawmakers are pushing a plan to give regulators more power to keep the GSEs on financial firm ground.

What Congress is proposing

Bills considered in the House and Senate over the past few years - but not yet passed - would replace the GSE's current regulator with a stronger independent agency.

That agency would have more direct say-so over Fannie Mae and Freddie Mac, capping their investments and setting clearer limits - known as the "bright-line" - between the primary mortgage market, which the GSEs must keep out of, and the secondary mortgage markets, which should be their focus.

Bills have also proposed setting up an "affordable housing fund" out of Freddie and Fannie's profits - as well as expanding their portfolio caps by 10%, mostly to refinance subprime loans.

Status. The House passed a GSE-tightening bill lin '07, HR 1427, which eventually became part of a larger housing bill in '08. At the same time, responding to the credit crisis, Congress temporarily let Freddie and Fannie cover more expensive homes and hold less cash in its coffers - which, to cJ's unschooled mind, seems like mixed signals. (See Housing Jitters for more.) After their free fall in July, the Fed extended short term loans to the two bohemoths (a privilege that previously just went to banks and - recently - financial institutions) - and Congress added extra financial backing for the companies into a larger housing bill.

More reading

Updated February 23, 2009

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How Does Knowing This Help?

So after you read all the background, what conclusions may we draw? Not to do it again? But we will, because we haven't addressed two underlying economic realities:  the rich have arranged it again to fatten themselves by manipulating a false free market, yet the poor still need housing; and the rich have arranged it again to fatten themselves by legalizing and funding abortion, and yet the poor suffer the resulting contracting economy. Fifty million is the count since 1973, fifty million Americans who would be buying cars and homes and televisions and computers and cotton sheets and wedding rings and -- but the rich decided long ago that they stood the best chance to stay rich if they eliminated those others.

 

This article merely describes the mechanics and leaves the premises untouched.

Janet Baker (not verified) | November 21, 2008 - 12:12pm