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Is it the End of Fannie Mae and Freddie Mac?

Posted by Richard Soto on Monday, February 3rd, 2014 at 11:05am.

Fannie Mae and Freddie Mac, the two government-backed mortgage lenders that were part of the major housing market implosion that occurred just a few, short years ago, are now part of a debate about whether these agencies are becoming obsolete.

President Obama recently said that it may be time to “wind down” these two agencies, and Republicans in the House say that mortgages should be funded primarily by private investors. However, the Senate recently proposed a bill that would still keep the government involved in the mortgage industry, thereby allowing individuals easier access to mortgages.

What is agreed is that, if the two government agencies of Fannie Mae and Freddie Mac were eliminated, it would likely cost the consumer more to obtain a mortgage, as private investors would have to shoulder the burden of mortgage defaults.

Is Freddie Mac and Fannie Mae Necessary?

For the health of the mortgage industry, many believe that, without these government-backed mortgage lenders, the housing market would come grinding to a halt. During the nation’s housing boom, a whopping 60 percent of all mortgages were backed by private investors. However, during the subsequent housing bust, private investors fled the scene of the crime, so to speak, which would have left millions of Americans who wanted to purchase a River Oaks home out of luck. Fast forward to today and more than 90 percent of all mortgages are backed by the government agencies of Fannie Mae and Freddie Mac.

Fannie and Freddie Today

Although the cost of rescuing Fannie and Freddie during the housing bust was, by most accounts, quite controversial, these two agencies are now operating in the black, with Freddie Mac recently announcing that second-quarter earnings jumped an impressive 65 percent, to $5 billion. Both agencies, since recovering in 2011, have paid their profits back to the U.S. Treasury, resulting in more than $130 billion in dividends going back to the government.

Where to Go From Here

Although both Fannie and Freddie are operating well today, no one wants to repeat the government bailout of a few years back. As such, there are proposals to eventually eliminate their role in the mortgage industry. However, in order for this to take place, the government will need to offer private lenders better financial incentives, which will then cost borrowers more in the long run. At this point, although there is talk about eliminating these agencies, no one wants to be responsible for doing anything that would slow growth at this point.

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