We’ve entered a new phase in government intervention. The federal government has now taken over Fannie Mae and Freddie Mac. Most people have heard of these entities but really have no idea what they do.
Fannie Mae is officially known as the Federal National Mortgage Association. It was formed under FDR in 1938 to provide liquidity in the mortgage market. Instead of just lending money for, say, 30 years to a mortgage holder and collecting the payments, Fannie Mae bundles its mortgages and sells mortgage-backed securities or bonds. This provides an immediate infusion of fresh money to make new loans without having to wait 30 years to get their money. This scenario works great if everyone is making their mortgage payments. When they’re not, Fannie Mae, or any other entity that does business this way, is in big trouble. That’s what happened with the current housing problem. Too many people defaulted on their loans and not enough new money was being funneled into the market. That’s why you hear lenders saying that “money is tight” right now.
At its inception, Fannie Mae was a government agency but was converted to a private corporation in 1968 to get it off the government books. Although no longer a government agency, Fannie Mae has been closely regulated by the federal government and the looming prospect of it being taken back over by the government was always in the offing if Fannie Mae failed. It did and, subsequently, it has now been taken over by the government.
Freddie Mac, officially known as the Federal Home Loan Mortgage Corporation, is similar to Fannie Mae. It operates with the same government oversight and the same chance of being taken over by it. It, too, was taken over by the federal government. Essentially, these two entities have been bailed out by the federal government, although government officials are slow to call it that. What this means is you and I have just assumed the debt of Fannie Mae and Freddie Mac. This was done to ensure their solvency, but what would happen if they went under?
Some experts predict if Fannie Mae and Freddie Mac fail, then it would set off a worldwide recession or depression. After all, Fannie Mae is responsible for 80 percent of the new mortgages being made. But, what would happen if Fannie Mae disappeared? That’s the big question.
I’m certainly no financial expert but it seems to me that if Fannie Mae and Freddie Mac disappeared there would be other lenders ready to step in and take over their business. Remember, both entities have real assets. They have notes attached to real homes all across the country. Sure, if someone defaults, then they have to sell the home to get their money, but the housing market is coming back. In other words, their assets aren’t worth zero.
The problem, we all know by now, is that too many people bought too many houses they just couldn’t afford. Credit histories were ignored to get people into more homes than they could handle and many of these people are defaulting. Keep in mind that the vast majority of us are not in default. For most of us, the housing problems don’t affect us. One has to question the wisdom of our government having to raise its debt ceiling to take over the debt of those least likely to pay it back.
I’ve had to wait to get the things I want. There are things I want right now but I’m paying off debt before I acquire new debt. Our government should do the same.
Phil Valentine is an author and nationally syndicated radio talk show host with Westwood One. For more of his commentary and articles, visit philvalentine.com.
