Are the taxpayers liable for repaying this debt?Īlthough there might be legal questions about this, Pollock says the government is effectively responsible. “Bonds were sold all over the world and the investors were told it was the same as buying a US Treasury bill but you get a higher yield,” says Pollock.Īlthough the shareholders of Fannie and Freddie lost their entire investments after the government took them over, the bond holders have had no losses. Pollock says a significant amount of the debt is held by foreign investors. Some $1.5 trillion is not secured but considered to be guaranteed by the US government. “When you have a crisis you universally have government interventions to get you through the crisis.” How much debt do the companies have, and who owns it?īoth Fannie and Freddie have a combined debt of $5 trillion, most of it secured by actual mortgages. If the GSEs were not making the loans, “the immediate crisis would have been worse,” says Mr. But on an ongoing basis, they are even more important since the private mortgage market has shrunk considerably.įannie and Freddie represent about 70 percent of all new mortgages, while the Federal Housing Administration (FHA) is another 20 percent, estimates Alex Pollock, a housing expert at the American Enterprise Institute. The two companies represent 50 percent of all US first mortgages issued in recent decades. How important are the companies to the mortgage market? “These changes are falling disproportionately on the underserved and working class who do not have the downpayment, or value in their house, or higher FICO scores,” says John Taylor, CEO of the National Community Reinvestment Coalition, a Washington-based organization that lobbies for working-class families. Since the government takeover, Fannie and Freddie have tightened their lending standards in terms of requiring higher FICO scores, raising their fees, and requiring a larger downpayment. In order to prop up both organizations and the mortgage market, the US Treasury has added $150 billion total to the lenders’ balance sheets. The Bush administration was forced to place them into a conservatorship, where they remain today. In 2008, after the credit markets froze and the housing market collapsed, both companies experienced enormous losses to the value of their portfolios, which had also become increasingly filled with risky mortgages. What is the status of the two organizations? In turn, Fannie and Freddie, like private lenders, packaged those mortgages together and sold them to investors all over the world who were enticed by the implicit government guarantee.
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Later, they began buying home loans made by banks, in order to free up banks to make more loans. Initially, their role was to establish benchmarks for loans, and through transparency help reduce interest rates for borrowers by bringing standardization to the industry. As such, they became known as Government Sponsored Enterprises (GSEs) and were exempt from US Securities and Exchange Cmmission regulation, exempt from state and local taxes, and had a line of credit from the US Treasury. By 1980, they were encouraged to compete against each other.īoth Fannie Mae and Freddie Mac had unusual structures: they were private companies with private shareholders but were protected financially by the US government. In 1938, as part of the New Deal, President Franklin Roosevelt created the Federal National Mortgage Association, now known as Fannie Mae, whose mission was to provide local lenders with federal money to finance home mortgages.ĭuring the Vietnam war, in 1968, President Lyndon Johnson privatized Fannie Mae to remove it from the federal government’s balance sheet and created another quasi-private company, the Federal Home Mortgage Corporation, known as Freddie Mac, which would deal with the savings banks.
Here is some background on the housing giants and the Obama administration’s plan: Who are Fannie and Freddie? Geithner’s aim, according to the white paper, is for the government’s main role to be “limited to robust oversight and consumer protection, targeted assistance for low-and-moderate income homeowners and renters, and carefully designed support for market stability and crisis response.” On Friday, Treasury Secretary Tim Geithner issued a white paper discussing the government’s options and the Obama administration’s plan, which he says “dramatically transforms the role of government in the housing market.” Now, the US Treasury is exploring ways to wind down its involvement with the mortgage giants. Since the financial crisis began, Fannie Mae and Freddie Mac, which buy and insure mortgages, have needed $150 billion in support from Uncle Sam.
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