Fannie and Freddie: Where Do They Go from Here?

June 2, 2011

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.

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