First, a bit of background: Congress established the GSEs generations ago to expand home ownership to qualified low- and middle-income buyers. Until recently, the system worked just fine. Although they’re not lenders, Fannie and Freddie, along with the FHA and VA, play an important part in the existing mortgage market by backing about 90% of all home loans today. In other words, GSEs buy mortgages from primary lenders, such as your local bank. This system gives your local bank money so it can offer mortgages to more buyers.
So what’s the problem? Despite their intended purpose, things got out of hand and the GSEs began buying bundles of loans that included exotic, high-risk, and undocumented mortgages, which helped stimulate the housing crisis. Because of their congressional charter, investors assumed that loans backed by GSEs were guaranteed by the federal government. Although not technically true, when the GSEs became insolvent, the government decided to take control and go ahead and back the mortgages. That’s why we taxpayers are on the hook for $160 billion to bail out Freddie and Fannie when the mortgage market collapsed in 2008.
Now what? Both Congress and the Obama administration agree that GSE reform is needed to protect taxpayers from another housing crisis. But extremists on Capitol Hill are taking things too far, championing the elimination of Fannie and Freddie in favor of an entirely privatized secondary mortgage market. The result of such a drastic change would be crippling to home buyers, owners, and sellers. Without a secondary market:
- Determined completely by Wall Street, interest rates will be unnecessarily high.
- Consumers will find it difficult to find financing, especially in times of economic turmoil.
- Property values will drop because potential buyers won’t be able to find financing.
The private market is not, and may never be, prepared to take the place of GSEs. Some experts say the outcome of such a move would be a 20-plus-year decline in home ownership and therefore a 20-plus-year decline in property values.
What’s the answer? The need for GSE reform is undeniable, but the government can’t simply wash its hands of mortgage funding without hurting home owners and hindering consumers’ ability to obtain an affordable loan. A steady flow of mortgage funding is essential to the nation’s economic recovery and long-term health of the housing market.
This can be achieved through sound and sensible underwriting and secondary mortgage market facilities that work to protect the taxpayer while providing financing for consumers who have demonstrated the ability to sustain home ownership.
Only time will tell if Fannie Mae and Freddie Mac will weather the storm of congressional reform, but one thing is for sure — their intended mission is crucial to the future of home ownership and the country.