Yesterday, Wednesday August 7th, President Obama announced his intentions to reform the real estate housing industry. Mr. Obama revealed his plan to ‘wind down’ Fannie Mae and Freddie Mac, two prominent government-supported mortgage agencies.
Who are Fannie Mae and Freddie Mac?
Fannie Mae (FNMA) and Freddie Mac (FHLMC) are prominent secondary market agencies. In the secondary loan market, investors and government-sponsored enterprises buy and sell mortgages secured by real estate. The intent of the secondary mortgage market is to nationalize loans in order to make funding more accessible to loan borrowers when local funds are scarce. The government has played a central role through Fannie Mae and Freddie Mac in stabilizing local mortgage markets and making homeownership feasible for the average person.
Why do we need these two mortgage giants?
Fannie and Freddie back nearly 90 percent of new home mortgages across the United States. These government-sponsored enterprises lower the cost of borrowing and support flexible financing options to suit a variety of needs.
Why would Obama want to restrict these agencies?
During the housing crisis of the early 2000’s, Fannie and Freddie contributed to the downturn by lending to borrowers who simply could not repay the amounts borrowed. By the middle of the collapse, the two giants were broke and had to borrow $187 billion of government funds.
Fortunately by early 2011, this crisis ceased and money is now flowing from the two giants back to the government. Fannie and Freddie are currently seeing record-breaking profits… providing the government with hundreds of billions of dollars per year.
The argument Obama makes is that these agencies are quite unpredictable. No one wants a repeat of the billion-dollar bailout and some people believe the risk is just too high to keep these lenders going.
On the other hand, Fannie and Freddie are currently raking in huge profits for the government. They give the average person the ability to afford a home loan. By privatizing the mortgage market and limiting Fannie and Freddie in insuring mortgage securities, interest rates will rise and loans will become relatively more expensive.
So what does this all mean?
No clear decision has been made on reforming or limiting government-sponsored enterprises in the mortgage market. Do we limit the housing market to private investors and consequently tighten homeownership viability, or do we continue to provide government-sponsored securities with the chance of undergoing another housing crisis?
Further debate on this topic is coming in September… tune in!
Interested in finding out more about home financing in the Greater Seattle Area? Check out our website HERE.
*Interview Information Courtesy of CNBC