The Elimination of Fannie and Freddie Will Increase Mortgage Rates

While Fannie Mae and Freddie Mac are two separate companies, they both act as guarantors of mortgages and purchasers of “conforming” mortgages which eventually are sold to investors. Before they failed in 2008, they were both considered to be extremely safe companies which allowed them to borrow money at extremely low rates.

However, once the housing bubble burst and their credit quality slipped, there was uncertainty about the proportion of the mortgages that would be repaid on time, and investors were not able to determine the actual value of their bonds. As they were guaranteeing the repayment of the mortgages, Fannie Mae and Freddie Mac were subject to huge losses.

By mid-2008, they both had low capital levels compared to their assets and liabilities, and federal regulators decided to bailout the failing giants before they defaulted. On September 6, 2008, the Federal Housing Finance Agency took both firms into conservatorship, placing control of their activities into the government’s hands.

Recently, a group of House Republicans outlined details of a bill (called PATH) which would result in the elimination of mortgage giants Fannie Mae and Freddie Mac altogether within five years. House Financial Services Committee Chairman Jeb Hensarling (R-Texas) plans to introduce a bill shutting down the foundation of the two entities, while overhauling the Federal Housing Administration (FHA). He claims that the bill will provide potential homebuyers with more mortgage product choices, while creating more competition in the housing finance market.

Democrat Rep. Gary Peters of Michigan expressed concerns that the implication of the proposed legislation would be a negative effect on the housing market, and that eliminating 30-year fixed rate mortgages (which did not exist before the creation of Fannie and Freddie) would make homeownership too expensive.

For more information about how changes to Fannie Mae and Freddie Mac may affect the housing market, contact the  Zwahlen Team.