As soon as I heard about the federal government’s takeover of Fannie Mae and Freddie Mac, I began wondering what this will mean for homeowners in the long term.
First, to fully understand the importance of these two companies and their bailout, you have to appreciate how they helped millions of people become homeowners.
Fannie and Freddie don’t directly lend money to individuals. Instead, they were created to establish a regular flow of money to lenders who actually make home loans. The institutions buy loans from mortgage lenders — commercial banks, savings institutions and credit unions — and that in turn allows those institutions to make additional home loans.
Fannie Mae was created in 1938 during the administration of President Franklin D. Roosevelt when millions of families couldn’t afford to buy a home. Freddie Mac came along 32 years later.
The two institutions were chartered by Congress as government-sponsored enterprises and had an implicit guarantee from the government that they would not fail. Now we see that the implicit guarantee has become an actual guarantee.
In 2007, the two companies reported a combined loss of just under $5.2 billion, according to a Congressional report. Until then, they had not reported a combined loss since 1982.
To prevent a crushing blow to the housing market, the federal government stepped in to bail the companies out.
So what now?
Well, weep if you own stock in the company. Fannie Mae’s stock has steadily declined from a 52-week high of $68.60 to a close of just 73 cents on Sept. 8, the day after the Treasury Department announced the federal bailout. It’s been a similar bungee drop for Freddie Mac, whose 52-week high was $65.88. The stock closed on Sept. 8 at 88 cents.
Fannie and Freddie’s financial problems don’t pose a risk if you aren’t planning to sell your home anytime soon or you don’t want to refinance.
The larger question is: Should Fannie and Freddie continue to exist at all?
Absolutely, says economist James Galbraith, the Lloyd M. Bentsen Jr. chair in government and business relations at the University of Texas.
The government bailout is a good thing, said Galbraith, the author of “The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too.”
“It’s hard to see how it could have been avoided,” Galbraith said in an interview. “These institutions created American homeownership as we know it. They created a flow of money to the housing market. All of us who are homeowners will be high and dry if this function gets taken away.”
In announcing the takeover of Fannie and Freddie, Treasury Secretary Henry Paulson said it was necessary to continue “supporting the availability of mortgage finance.”
But there are those who think the bailout should be a prelude to a reduced role of both Fannie and Freddie in the supply of mortgage money.
Radhakrishnan Gopalan, assistant professor of finance at Washington University in St. Louis, said that in the long term, he sees a significantly diminished role for Fannie and Freddie.
“The ideal option would be to gradually downsize them, limit their activity to only those sectors where there is a genuine need for government support for mortgage finance and let the private sector take over the financing of most mortgages,” he said.
Gopalan believes the capital markets are “sufficiently well developed to make mortgages cheap and accessible.”
My concern is we don’t really know what the market will do without a Fannie and a Freddie. We do know that there are too many areas of the country where the working class can’t afford to buy.
If the prices of mortgages rise significantly in the absence of Fannie and Freddie, we may return to a time when only the financially well heeled could afford to buy a home.
With homeownership such a key part of people’s net worth, I’m not sure we can afford to eliminate or smack down Fannie and Freddie’s role in the housing market.
Washington Post Writers Group
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