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Why Do Away with Freddie Mac and Fannie Mac? They are Finally Making Money Again

The two government-sponsored enterprises (GSE), Freddie Mac and Fannie Mae, have been the whipping post for Republicans of government gone amok. You can't blame Republicans since combined Freddie Mac and Fannie Mae lost $138 billion dollars during the housing bust. You can't also put the blame for the losses squarely on the GSEs.

During the housing boom, there was rampant outright irresponsibility throughout the housing financing system. Some of the most blatant practices were "no-doc" loans, where a mortgage could be acquired without providing any financial information.  How could a lender give someone hundreds of thousands of dollars to buy a home without them having prove they can actually pay back the loan? They took this blind risk because the lenders who made those loans didn't hold onto them, they sold these loans to others, including Freddie Mac and Fannie Mae. Most people believe housing prices could never fall in tandem across the United States and we all know how that ended. After the housing bust, both GSEs were bailed out by the U.S. Treasury (taxpayers) and put into receivership of the Federal Housing Finance Agency.

Fast forward to 2012 and both Freddie and Fannie are a lot healthier and making money again. In the first nine months of 2012, Fannie Mae has had a $9.7 billion profit. Freddie Mac made an all-time record profit of $11 billion for 2012. Both are also paying back billions of dollars to the U.S. Treasury (U.S. taxpayers).

Better lending practices, higher home prices, and record low mortgage rates have helped both GSEs return to profitability recently. The National Association of Realtors reported in January that home prices are up over 12 percent year over year. Mortgage rates today on both 30 year and 15 year conforming loans are just above record lows. Current mortgage rates on 30 year conforming loans can be found as low as 3.50 percent and 15 year conforming loans are as low as 2.25 percent. The trends are expected to continue in 2013, which will lead to more profits for the GSEs.

Doing away with both Freddie and Fannie before some alternative is in place would be a colossal mistake and hurt the recovering housing market. Over many decades, both GSEs played a vital role in the U.S. housing market and continue to do so today. In fact, their roles are even more vital to the housing market than it was just a few years ago. In the first quarter of 2012, the GSEs made up the majority (59 percent) of all mortgage loans serviced.

Who would step in to buy these loans? Investors would buy some of these loans but not all, especially with 30 year mortgage rates so low. Doing away with the GSEs would send mortgage rates a lot higher from current levels. The GSEs also play a vital roles for first time homebuyers, allowing them to buy a home with as little as 3 percent down through FHA mortgage loans.

Regular mortgage loans require the borrower to put a 20 percent down payment on a home purchase, which can be a large obstacle for many first time home buyers. By keeping the GSEs in place, they would continue to make money and help provide liquidity to the housing market by buying loans from lenders and freeing up capital so lenders can make more loans.

Just this week the regulator that is overseeing both GSEs came up with a plan to combine both into one company. On Monday, the plan was announced by Edward DeMarco, acting director of the Federal Housing Finance Agency. The director said the combined company would have its own CEO and board chairman.
Author: Brian McKay
March 6th, 2013