Ever since the great housing collapse of 2008, legislators and regulators have tried to scale back – or even eliminate – federal mortgage megalenders Fannie Mae and Freddie Mac. But as new regulations n private lenders, the agencies everyone loves to hate just keep on ticking.
Fannie Mae and Freddie Mac collectively account for the majority of residential home loans serviced in the US. But even as their much publicized troubles fuel calls for their demise, financial experts worry: if they’re gone, will the scandal ridden private lenders be able to step up?
Fannie Mae (real name: the Federal National Mortgage Association) is an old lady now – and one with a colorful past. Fannie Mae was first created in 1938 as part of President Franklin Delano Roosevelt’s post-Depression New Deal. Fannie’s original mission was to help boost home ownership by providing local banks with federal money to finance home mortgages.
Fannie Mae would do this alone as a government backed entity for the next thirty years. But in 1968 Fannie Mae was restructured, splitting into two separate entities: a new version o Fannie Mae that was placed into private ownership to keep it off federal budget rolls, and a new entity, the Government National Mortgage Bureau, or Ginnie Mae, which remained under government ownership. It dodged the post crash chaos and is still the only home loan agency that’s fully backed by the US government.
Freddie Mac, or the Federal Home Loan Mortgage Corporation, came along in 1970 and was originally intended to be a competitor of Fannie Mae, in order to create a more robust secondary mortgage market and remove Fannie’s monopoly. But as the housing market balloon swelled and eventually burst in 2008, Fannie and Freddie both faced the same troubles.
Facing massive losses after the housing crash, they were bailed out by the government to the tune of $188 billion and eventually placed into conservatorship under the regulation of the Federal Housing Finance Agency. They’re still under that conservatorship today. But both Fannie and Freddie continue to originate the mortgage-backed securities that back home loans serviced by a host of private lenders such as banks, credit unions and other kinds of financial institutions.
Amid calls for ways to impose better oversight on mortgage lending and protect consumers from becoming victims of predatory lending practices, lawmakers from both parties began to explore ways to phase out Fannie and Freddie. Possible scenarios included greater privatization, complete dissolution, and tighter regulation.
But in the meantime, new laws targeting the banking industry and private mortgage lenders were tightening mortgage lending standards and making it harder for marginally qualified buyers to get mortgages.
In the scandal ridden years after the crash, virtually all of the nation’s leading banks fell under investigation for charges of fraud, misrepresentation and other illegal activities. So the Dodd Frank Wall Street Reform and Consumer Protection Act became law in 2011, ushering in a number of new rules that banks and other private lenders had to follow in order to avoid penalties.
The new regulations included the creation of the Consumer Federal Protection Bureau, which promptly imposed the Qualified Mortgage Rule on new loans serviced by most banks and other institutions. In order to avoid penalty and major losses, banks had to ensure that the mortgages they serviced conformed to the tighter standards of the QMR, which included such things as higher credit scores, a stricter debt to income ratio, and larger down payments for home purchases.
But the new regulations meant many potential buyers couldn’t qualify for a mortgage, which threatened to stifle the already struggling housing market. In a time when home ownership was already at the lowest rates in over two decades, the new regulations designed to restore order in the housing market appeared to be stifling it instead.
In the meantime, Fannie and Freddie instituted new policies of their own, restructuring the loan securitization process and relaxing down payment and credit score requirements for mortgages they sponsored. These were steps aimed at supporting a housing recovery facing a slowdown because of the very regulations aimed at preventing another crash.
With the mortgage lending industry in flux and would be buyers locked out of the lending process, Fannie Mae and Freddie Mac continue to dominate the US home loan landscape And although they’re still in the crosshairs of legislation aiming to reform the mortgage markets, they won’t be going away any time soon. (Top image: Flickr/futureatlas)
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The American Monetary Association Team