Fannie and Freddie: Where Do They Go from Here?

Like a lot of people, I’ve spent many years not knowing exactly what Fannie Mae and Freddie Mac do. Until the housing meltdown, I would have been hard pressed even to tell you whether they were Federal agencies or not (they’re not – they are government-sponsored enterprises, or GSEs). As is often the case, it takes hard times to focus one’s attention on such things but, according to Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market, a lot of people more knowledgeable than me didn’t know much more – the extent to which Fannie and Freddie’s debt securities and mortgage-backed securities (MBSs) were backed by the Federal Government, for example. Apparently some investors found out when it was too late.

Thanks to this excellent Congressional Budget Office (CBO) publication – one of Library Journal’s Notable Government Documents for 2011 – I now have a better grasp on what these two entities actually do, how they flourished in good times and wilted in the financial crisis of 2008, and where they may need to go from here, which is the crux of the CBO’s analysis. It offers three main scenarios – keeping them as GSEs, making them wholly Federal entities, or totally privatizing them. In explaining all of this, it’s helpful that the report uses boxes to highlight important aspects of its research, since laypersons (me) tend to get lost when exposed to too much financial expertise per square inch.

I also enjoyed finding out about other mortgage systems that might be worth exploring, such as that in Denmark, “where 30-year fixed-rate mortgages have been common…mortgage originators fund an individual mortgage by issuing a matching bond. Danish mortgages have a unique feature that allows borrowers to benefit from unexpected increases or decreases in interest rates. When rates rise, borrowers can repurchase their mortgages for less than the amount of the outstanding principal balance…When rates fall, the borrowers can take advantage of refinancing opportunities. In the Danish system—as in other systems that provide borrowers with options that are costly to lenders—borrowers ultimately pay for those features in the form of higher interest rates or fees up front.”  Interesting, indeed, although I’d be the last one to actually consult on something like this!

Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market seems like a great guide for policy makers and anyone interested in the backwash from the great housing debacle of the past few years. It’s available to read here, you can get a personal copy here, or cozy up with a copy in a library.

8 Responses to Fannie and Freddie: Where Do They Go from Here?

  1. Stephen from Home Loans SA says:

    I hope that someday the South African government can help those who can not pay their home loans. People in the US get help why not our South Africans. Great work.

    Like

  2. Stephen says:

    I hope that someday the South African government can help those who cannot pay their home loans. People in the US get help, why not our South Africans? Great work.

    Like

  3. James says:

    super stuff great site, really good.

    Like

  4. Reverse Mortgage says:

    Though flawed, it is apparent that this resource can be very helpful to help people more thoroughly understand what is going on. Thank you for providing this resource.

    Like

  5. Daniel North says:

    Thanks for the reference. I think they serve an important purpose and there is a need for such an arrangement but even as a totally private enterprise they would be too big to fail.

    As a note Fannie Mae did fine in the secondary market until they lowered their underwriting standards to cash in on the risky mortgages when Wall Street was bailing out. They ultimately were the biggest seller of subprime mortgages on the secondary market.

    Any oversight must include prevention of lowering underwriting standards if we keep this marketing vehicle in place.

    Like

  6. [...] This is a highlighted new Government Document from the Government Printing Office’s blog.  For more information, check out Government Book Talk. [...]

    Like

  7. Joseph King says:

    Unbelievable! Where has HONESTY gone? Has their ever been any? Oh, Yeah, GREED. Dispicable. Lets bring back the firing squad! Why spend more on legal issues?

    Like

  8. zannias vasilis says:

    ACTUALLY , “FANNIE MAE , FREDDIE MAC , AND THE FEDERAL ROLE IN THE SECONDARY MORTGAGE MARKET” SEEMS LIKE A GREAT GUIDE FOR POLICY MAKERS AND ANYONE INTERESTED IN THE BACKWASH FROM THE GREAT HOUSING DEBACLY OF THE PAST FEW YAERS.IN ADDITION THE MORTGAGE SYSTEM IN DENMARK IS A SEPARATE SYSTEM WITH A UNIQUE FEATURE!I WISH TO HAVE A SYSTEM LIKE THIS IN MY COUNTRY , BECAUSE THE BANK SYSTEM IN GREECE ACTS AS A ROBBER!!!THIS IS ANOTHER STORY!
    BUT , EVERY ECONOMIC CRISIS HIDES …OTHER SITUATIONS!
    FOR EXAMBLE:I HAVE TWO QUESTIONS!
    1)WHEN BEGIN THE FINAL ECONOMIC CRISIS IN 2008?ANSWER:TWO OR THREE DAYS AFTER THE RUSSIAN STRIKE IN GEORGIA!
    2)THERE IS GOLD IN FORT NOX IN THE U.S.A.?ARE YOU SURE?I AM NOT SURE ABOUT THIS!AND THE FINAL SEXUAL HISTORY OF STROSS KAN RELATED TO THIS?
    CONCLUSION:NOTHING IS WHAT IT SEEMS!!!

    Like

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