Is There a Super Giant Lurking Around a Corner?
The future for Freddie and Fannie is shaping up to change as the two mortgage giants begin preparations to form a new joint company for securing home loans. In what is being aimed towards reducing government involvement in the mortgage market, the new platform will force Freddie and Fannie into a single unit, forgoing their current separate systems. The goal, according to Edward DeMarco of the Federal Housing Finance Agency, is to build a single infrastructure to support the mortgage credit business.
“The overarching goal is to create something of value that could either be sold or used by policymakers as a foundational element of the mortgage market of the future,” DeMarco explained to the National Association for Business Economics.
The Inundation of Freddie Mac and Fannie Mae
While policymakers have yet to decide how this new security platform will operate, the new company will initially be owned by both Freddie and Fannie, and the company will have a separate chief executive and board. It is not expected to begin securing loans until next year.
The two super financing giants, Freddie Mac and Fannie Mae were bailed out by the government back in 2008 with nearly $190 billion in aid, which was the most costly bailout of the financial crisis. To date, the companies have repaid a combined total of $52.3 billion. To date, Freddie and Fannie own or guarantee approximately half of all U.S. mortgages. That's about $5 trillion in home loans.
The giants are public government-sponsored enterprise companies, both designed to expand the secondary mortgage market by purchasing mortgage loans from lenders so they can reinvest their assets into more lending. Most borrowers never come into contact with Freddie and Fannie, as they work with lenders rather than consumers. But the role of Freddie and Fannie is substantial in the mortgage industry as well as the economy.
How Does a Giant Come About?
Freddie and Fannie were both created by Congress, and while there's no huge difference between their missions for buying and guaranteeing loans, their origins differ. Fannie was created first under President Roosevelt back in 1938 as a part of the New Deal to ensure that funds were available in the housing market during bad economic times. Freddie came into being in 1970 to prevent any further monopolization of the market.
The Inevitable Dissolution of two Giants
In a reaction to what happened in 2008, Obama began making plans in 2011 to push Freddie and Fannie out, but it wasn't immediately clear what Obama's Administration wanted. In favor of one detailed plan, they rolled out three different proposals to end the giants, but none has yet to be enacted.
“We are designing this to be flexible so that the long-term ownership structure can be adjusted to meet the goals and direction that policymakers may set forth for housing refinance reform,” DeMarco said.
As the government works on restructuring Freddie and Fannie, the housing market continues to show promise of continued recovery with strong numbers of home sales bolstered by record-low mortgage rates and low inventory levels. According to the latest Zillow Home Value Index, January home values were up 0.7 percent from December 2012 and 6.2 percent from the same time last year. The 6.2 percent annual gain is the largest since July 2006. The last time we saw national home values at this level was in June of 2004.
Though Freddie and Fannie> have returned to profitability thanks to an improving housing market, both Republicans and Democrats agree that the financial giants need to be replaced.
National Association of Realtors: Fannie, Freddie Footprint to Shrink With New Company
www.nbcnews.com: Fannie, Freddie to Form New Company
www.nytimes.com: Fannie-Freddie in Venture to Securitize Home Loans
PropertyWire: Largest Annual US Home Values Rise Since July 2006 Recorded