What’s Ahead for Fannie Mae and Freddie Mac?

AMA3-7-15Fannie and Freddie are still headed for the chopping block.

The demise of those venerable home loan agencies Fannie Mae and Freddie Mac might not seem to matter to anyone who’s not looking to buy a house. But some market watchers worry that the dismantling of the nation’s biggest mortgage backers could push the entire US economy into recession.

For decades, Fannie Mae (real name: Federal National Mortgage Association) and her younger brother Freddie Mac (the Federal Home Loan Mortgage Corporation) have been the mainstay of the US mortgage industry. Together they account for over half the home mortgages in the country, and over 90 percent of new loans.

Fannie Mae originated back in 1938, a product of the post- Depression New Deal that promised better lives and financial security for Americans. Offering home loans with terms up to 30 years, Fannie Mae made it possible for more Americans to buy homes by leveraging future earnings.

Freddie Mac entered the picture much later, in 1970. Its creation allowed the government to expand its reach into the mortgage business and capture a larger share of the secondary loan market.

Fannie and Freddie in themselves don’t create loans. They buy loans, repackage them and offer them on new terms, often through secondary servicers such as banks and other kinds of financial institutions. Because loans originated by these two agencies are long term and government backed, they offer the best option for many first time homebuyers to get a mortgage.

But Fannie and Freddie’s dominance of the US home mortgage market also contributed to their potential demise. Loans backed by these two agencies played a major role in creating conditions for the housing collapse of 2007-2008, when millions of unprepared homeowners fell into default and foreclosure.

Facing collapse thanks to so many failed mortgages, Fannie Mae and Freddie Mac ended up with a government bailout of $187 billion. Both agencies were placed into conservatorship, with outside oversight of their lending activity.

As the dust settled, the government took a harder look at the lending practices – and practitioners – that contributed to the crisis. Along with creating new legislation to protect consumers and pursuing criminal and civil cases against Bank of America and other leading lenders, lawmakers began calling for the demise of Fannie Mae and Freddie Mac.

Since 2012, several bills, originated largely by House Republicans, have proposed various plans to dismantle the two megalenders, or at least reorganize them into a single, largely privatized agency. Though none of those has passed, the current administration is still on board with the idea as a way to forestall another housing crisis.

That means that Fannie and Freddie will one day be things of the past – and as they exit the scene, so might their long term fixed rate loans, which made home buying accessible to cash-strapped buyers and investors. And that’s what has financial experts and economists concerned.

With Fannie and Freddie gone or restructured with more privatization, home loan options could change too, with a greater emphasis on shorter term adjusted rate mortgages. And that, along with the new tighter standards, could shut even more buyers out of the process – unless they have cash in hand. Fewer home sales translate into lower home prices, which could ultimately lead to another round of crisis for the housing market.

And that, some fear, could contribute to a slowdown in the economy overall, as housing sales flatten and so do housing related industries. If that happens, it could have a ripple effect on employment and retail sales that would affect everyone.

It’s not clear what the future holds for Fannie and Freddie. Though some lawmakers and economists call for the government to get out of the mortgage business completely, these two agencies still dominate the home loan landscape. And since there isn’t a clear plan or timetable for the changes, buyers can’t adjust their expectations accordingly.

For now, though, some real estate experts and financial advisers are encouraging consumers to buy while they can to secure the loan products they know – before Fannie and Freddie are gone for good. (Top image:Flickr/EGuideTravel)

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The American Monetary Association Team

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