The End of Fannie Mae and Freddie Mac

By James Power

The U.S. Treasury introduced its plans today to do away with troubled mortgage giants Fannie Mae and Freddie Mac in the coming years.

The two firms have been the primary driving force behind the expansion of American home ownership since Fannie was founded in 1938.

Today they provide a secondary market for 9 of 10 American mortgage loans, buying up the paper from issuing banks, packaging them and selling them to investors as guaranteed mortgage securities.

During the 2008 financial crisis they collapsed into government conservatorship as a massive number of loans in its vast $5.6 trillion portfolio started to fail.

“This is a plan for fundamental reform of the housing market,” said Treasury Secretary Tim Geithner on an informational call for reporters.

It’s not unfair to say the American Dream – as epitomized by owning a home – changed a bit today. The government is getting out the ownership business, with members of the Treasury team suggesting that our housing policies need to be “rebalanced” to value renting as well as owning a home.

President Bush’s “ownership society,” and the ensuing run-up in home buying, is effectively over.

The process will take years to implement as the housing market is still massively fragile, there’s not a lot of private sector interest in mortgage paper and a glut of foreclosure sales keeps pushing the nation’s home values down.

“And I want to emphasize that we’re going to proceed on this path of reform very carefully so that we make sure we’re supporting the process of economic expansion and repair of the housing markets which are suffering the damage caused by the crisis,” said Geithner.

The Treasury’s plan is committed to winding Fannie and Freddie down over a term of 5-7 years, putting in place new regulations which will allow the private sector to replace the government involvement in the housing market.

The authors offered up three distinct “options” for how the future housing might work – a government “re-insurance” program to backstop private investors, a limited “re-insurance” program that scales up during recessions, or no government backstop at all.

Treasury and White House officials will begin the process of working with Congress to build consensus around one of the three options and bringing legislation to the floor for reforms, “…in the next couple of years.”

As the Real Estate and financial markets continue to move up and down, mortgage rates can also be affected. Since mortgage rates are more closely tied to the bond markets, an up or down move in the stock market may not have the result in mortgage rates that one might expects. In fact, many times the resulting mortgage rate changes are counter-intuitive.

More importantly, rates change daily and they can change quickly. Some mortgage professionals have recently noted that their rate quotes have only had shelf lives of three to four hours before market changes have deemed them inaccurate.

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How does a consumer navigate fast changing markets in order to refinance their existing loan or purchase a home with the most favorable terms possible?

1. Plan – Define your needs ahead of time, do not wait until the last minute. This is especially true of home purchases.
2. Consult – Talk to your mortgage professional on a regular basis so they can interpret recent market events to you and communicate how those events can affect you.
3. Execute – When you have defined your needs and have determined that now is the best time to move forward, don’t shop yourself out of a good loan! What does this mean? It is easy to get caught up in shopping for the best rate, but it is not uncommon for home owners to miss locking their loan at a great rate because they are in search of better rates that do not exist or that they do not qualify for. It is important to shop to insure you are getting the best rate possible, but set limits to the number of companies you are going to consider doing business with and be careful of having your credit report needlessly and more times than is necessary!