One of the most important, but largely ignored, results of the Great Recession is the fate of the Federal National Mortgage Association (better known as Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac). These two organizations are unique in that they were chartered by Congress, but have functioned as nongovernmental corporations. In Washington-speak they are Government-Sponsored Enterprises or GSEs.
Both Freddie and Fannie have been in business to provide what is known as a secondary market for home mortgages. If a community bank, honoring its charter to serve its local area, chooses to lend money for a mortgage, that money will be largely tied up for 15 to 30 years as the homeowner makes monthly payments to reduce the size of the loan.
Freddie or Fannie will step in and buy that mortgage from the local bank, thereby guaranteeing the mortgage’s repayment and giving the local bank the ability to lend to another qualified homebuyer.
Fannie and Freddie get the money to buy these mortgages by doing what every major corporate entity in the United States does: They sell shares in the company and/or issue bonds which are loans.
Because they are GSEs, there has been a wink-and-a-nod understanding that those investments were protected by the full faith and credit of the United States. That wasn’t true, but it was a shared myth that allowed Fannie and Freddie easier access to both capital and credit.
The collapse of the housing bubble in 2007 and 2008 hit Fannie and Freddie especially hard, because they took seriously the guidance they were given to help expand homeownership to Americans who might not have qualified for a mortgage in prior years.
When the housing market collapsed, Fannie and Freddie were brought down with it, and, in fact, the government did step in to bail them out and put them into receivership.
Now that the markets have stabilized, the question comes: What to do with these two GSEs?
There is a bill in Congress known as the Corker-Warner (Sen. Bob Corker, R-Tenn., and Sen. Mark Warner, D-Va.) bill. This legislation would simply dissolve Freddie and Fannie and create a new entity as a full-fledged federal agency to handle their duties.
This plan leaves some investors holding worthless paper. A huge proportion of investors in Fannie and Freddie are retirees, pension plans, insurance companies and the very community banks that were their customers. They own some $33 billion worth of stocks. Why? Remember that “full faith and credit” business?
Investments in these two entities were considered good as gold, so pension and investment advisers steered their clients into these “safe” institutions. In fact, community banks were given credit against their reserve requirements for these investments by the organizations’ local regulators overseeing their business practices.
Fannie and Freddie are back to their core business and are making money. Lots of money. But the U.S. Treasury has determined that all of those profits should flow back to the government and none – in spite of the original agreements after the collapse – should accrue to the private investors.
It is obvious that something has to be done about Fannie and Freddie. That should not, however, put the entire burden of repaying the government on the backs of the small investors who had nothing to do with how the businesses were run, who believed in the Bill Clinton mandate of providing more housing to more Americans, and invested their money to help make it so.
The government’s policy of skimming all of the profits from Fannie and Freddie not only leaves investors in limbo, but keeps Fannie Mae and Freddie Mac as wards of the state. These enterprises need to be cut loose and allowed to function as private enterprises. As part of that process, investors would be given the opportunity to recoup the value of their investments.
The government should be very careful to ensure that the views and the needs of all the stakeholders in the Fannie and Freddie saga are examined, recognized and protected. •