Fannie Mae and Freddie Mac hold or guarantee approximately $5 trillion in national mortgage debt and both organizations were instrumental in effecting the mortgage meltdown that plagued the nation towards the end of the decade. Despite the involvement in the turmoil, the mortgage behemoths were deemed too big to fail and the Treasury Department seized Fannie Mae and Freddie Mac in September 2008. Since that point the government has funneled $200 billion in order to assist the agencies. Leaks from a white paper produced by the Treasury Department have indicated that the government is interested in reducing their role in the future.
The relationship between Fannie Mae, Freddie Mac and the U.S. Government is complicated. Fannie Mae (Federal National Mortgage Association) was launched in 1938 as a way to prop up the crumbling economy after the Great Depression. At that time, Fannie was tasked with buying up toxic mortgages held by lenders so the financial institutions would get back into the business of lending and stimulate the economy. It worked and because of the programs success, President Lyndon Johnson opted to create, Freddie Mac. Freddie Mac (Federal Home Loan Mortgage Corporation) was the tool implemented by President Johnson to remove the Fannie Mae debt from government records as well as prevent the business from evolving into a monopoly. Those systems have long been touted as successfully converting America from a nation of renters to one of home owners.
When the companies became publicly traded in 1989, the platform for the corruption of the system was laid. Public companies are responsible to shareholders not the common good of the people. In order to stay competitive within the mortgage industry, both lenders took calculated risks in approving less than qualified borrowers in order to deliver profits to their investors and when the effect of the toxic mortgages started to rise to the surface, the agencies crumbled, courtesy of the slew of mortgage default spreading through the nation. To prevent the situation from occurring again in the future, politicians have started to debate the future of the lenders and the "less is more approach" may be the solution.
Fannie and Freddie Excluded from Financial Reform
Fannie Mae and Freddie Mac have been instrumental in implementing mortgage modifications under the Make Home Affordable stimulus program. Because of behind the scenes relationships between the lenders and the feds, the titans were intentionally excluded from the financial reform bill entitled the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law July 21, 2010. The government specifically opted to exclude the lenders from the regulatory reform as additional chaos was expected to be the side effect and talks specifically addressing the issue were scheduled for a later date.
However, the Dodd-Frank Act did require the Treasury to submit a white paper in regards to the future of Freddie and Fannie. The document was to address issues including what entities will fund the mortgage market and the role of the government in future endeavors.
Fannie and Freddie Meeting August 17, 2010
Since Fannie and Freddie were excluded from the sweeping financial reform bill, the Treasury Department held a separate meeting in regards to the entities on August 17, 2010. The meeting was dubbed the Conference on the Future of Housing Finance and was held at the Treasury Department in Washington D.C. The gathering was a brainstorming session attended by academic experts, consumer and community organizations, industry groups, market participants and stakeholders and the main topic of conversation surrounded the future of both Fannie Mae and Freddie Mac. It is believed that this meeting was used to develop content featured in the white paper and recent leaks in regards to the document.
Government Considering Hands Off Approach
The complete white paper should be released later this week, but leaks from the research have indicated that the Government is interested in reducing the ties with the system they created. This expectation has come from an assortment of resources including MF Global, a policy research firm based in Washington and FBR Capital Markets.
According to FBR Capital Markets "We expect Treasury to call for a reduced government role over time in the mortgage market, with the ultimate goal of a reduction from more than 90% in 2009 to 50%." The belief is that the government will have a smaller role in the future but it will be slow to role out. FBR has said "We believe a reduced role is a given, but would not expect a reduction to the 50% mark for at least five years." MF Global agreed with the shift and implied that it may not be possible for the government to leave the market completely.
The Treasury department has yet to make an official comment on the situation.
