his past September, the Trumpadministration announced the latest ofmore than a dozen attempts over the

past number of years to reform the twodelinquent mortgage giants, those governmentsponsored enterprises (GSE’s) Fannie Mae(FNMA) and Freddie Mac (FHLMC). Theadministration indicated that it would supportreturning the toxic twins to private hands butdid not spell out how privatization would beaccomplished, nor how long it would take, orwhat it would cost. As my dad would say, this is aproject that is about as easy as trying to talk ahungry dog down off a meat wagon. The Wall Street Journaleditorial board more eloquently describes the effort as a“Sisyphian task”.

It is likely that if it is tried again, Mark Calabria aneconomic advisor to Vice President Mike Pence and theformer director of financial regulation studies at the CatoInstitute, now the head of the Federal Housing FinanceAgency (FHFA) will be involved in the process. He is, if youwill, the warden of the reform school conservatorship towhich Fannie and Freddie were committed in 2009 aftercosting taxpayers $190 billion to rescue them from theirprofligate ways. They survived and have reportedly repaidthe money but continue to allow the federal government toput a thumb on the scales of the mortgage market and sweeptheir profits into the general fund.

Fannie Mae and Freddie Mac were not born yesterday.They were not created to deal with the housing market boomof the early 2000’s, far from it. The Federal NationalMortgage Association, affectionately known as Fannie Mae,was chartered by Congress in 1938 during FranklinRoosevelt’s second term. The Federal Home LoanMortgage Corporation, nicknamed Freddie Mac, camealong in 1970. They were created to provide liquidity to themortgage market by buying loans from commercial banks,savings institutions, credit unions and other mortgage

November, 2019

FANNIE AND FREDDIE UPDATE

originators who issue residential mortgages.Can you imagine going into your local bankto apply for a mortgage only to be told thatthey had already issued as many as they couldthat month and you would have to wait untileither more deposits came in or somematuring loans currently on the books werepaid off. That was the liquidity dilemmaFNMA and FHLMC were created to remedy.

They also set standards for the loans that theywould accept. Fannie and Freddie functionby bundling these so called “conforming

loans” and selling their bundles as mortgaged-backedsecurities to investors. The system worked fine as long asthe standards held firm. By requiring that all the squarepegs went in the square holes and the round ones in theround holes with no exceptions, this cycle of packaging,sale and replenishment worked well until the degradationof these quality standards began. This cheapened theproducts that Fannie and Freddie were selling. Asmortgagors defaulted in droves during the GreatRecession, the mortgages backing these securities becamedelinquent forcing short sales and foreclosures at anunprecedented rate. The system unwound and themortgage backed securities market crashed.

Their financial entanglement with the federalgovernment, the harping of two of the largest lobbingentities in the country, the National Association ofRealtors and the Home Builders Association, along withthe aspirations of affordable housing advocacy groups,began to lead the twins and their cousin the FederalHousing Administration (FHA) astray. Congress hadpassed the Community Reinvestment Act and leaned onlenders to make loans in certain areas under looserfinancial terms than they would normally have made. TheConsumer Financial Protection Bureau (CFPB), thatcreature of the Dodd-Frank Act, has even exempted thegovernment sponsored enterprises from its “ability to

T

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Cont. from pg. 1

repay” qualified residential mortgage rules (QRM) whichrequire borrowers to have 43% debt-to-income ratios andan appropriate down payment. In 2018, about 30% of theGSE’s mortgage acquisitions exceeded the 43% thresholdwith some buyers putting as little as 5% down.

One might ask, haven’t we seen this film before and don’twe know how it ends? However, looking at rising homeprices, and homeless and affordability issues in many urbanareas, it is understandable why the pressure to easestandards exists. But are we again treating Fannie andFreddie as “Too Big to Fail” and thus encouraging them toact less responsibly?

There is one other question that lingers as well. Wouldprivatizing Fannie and Freddie cause the demise of the 30year fixed-rate mortgage? Thanks to their implicit and in

2009 fully demonstrated government guarantee, the toxictwins also benefit from lower capital requirements thanwould likely be placed on their privatized successors. Theresult would undoubtedly be the end of the 30 year loan.It would be as scarce as the 30 year same employer job.Steve Harney points out that in Canada, for example, theydon’t have 30 year fixed-rate mortgages available. Themajority of Canadian home loans are done at a 25 yearterm with the interest rate resetting every 5 years likeadjustable rate mortgages here in the U.S.

So the private successors to the toxic twins may no longerwish to make the 30 year mortgage option available to theAmerican homebuyer if the government removes its thumbfrom the scales and foregoes its backstopping role. It couldbe a brave new (or old) world without Fannie and Freddie.

Charles E. Schwartz II, CRB7234 Lancaster Pike, 100AHockessin, DE 19707302-234-5202Fax 302-234-5212cschwartz@psre.com

www.charlieschwartz.com

This report is courtesy of Charlie Schwartz of Patterson-Schwartz Real Estate.Not intended to solicit properties currently listed for sale. Copyright© 2017.

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