Demise of Fannie, Freddie won’t change mortgage lending too much
Hey folks, one of our companies just reported a $5 billion quarterly profit. The Federal Home Loan Mortgage Corp., affectionately known as Freddie Mac among stockholders (the taxpayers), chalked up a second quarter profit that’s the second highest ever in the history of the company.
The check’s in the mail, right? What do you plan to do with your dividend?
No, I guess not. The loot will go to ameliorating some $75 billion in red ink recorded since 2008. In fact, our two companies, Freddie and Fannie Mae (GSE’s, Government Sponsored Enterprises), are likely to disappear sometime during the next five years or so as the federal government gets out of the business of securitizing mortgages and turns the process over to the private sector.
There’s nothing at all wrong with the idea of an entity buying home loans and using them as collateral for readily marketable paper. Without the concept, just a fraction of mortgage loans made in the last 30 years of the 20th century would have been funded. Mortgage backed securities have brought capital from all over the world into the U.S. housing market.
But Freddie and Fannie joined enthusiastically in the running of the financial bulls in the early years of this century, right along with Merrill Lynch, Bear Stearns, Lehman brothers and all the other usual suspects. In the process, the American taxpayer got trampled and gored. And they didn’t choose to be in harm’s way. With the regulations and protocols put in place to control residential lending after the great meltdown, there’s no need for the public to pick up the tab for a greedy few.
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If you’ve checked the financial news, you’ve heard that the demise of the two companies will mean higher mortgage rates, which is probably true. However, fears of the death of mortgage lending as we know it are almost certainly exaggerated. Investors accept a lower rate on securities issued by the GSE’s because of government backing. That certainly will be lacking in the private sector, but what will be very much alive, well and restrictive will be the legacy of the GSE’s: their current underwriting guidelines.
These criteria have been codified into banking regulations and guidelines, so there’s no question that they’ll be followed. Consequently, there will be very few bad loans made, just as was the case before indiscriminate lending caused money to suddenly appear to be hanging from trees.
No one knows how much rates might rise when Fannie and Freddie get out of the business. Given the new controls that are now embedded in the system, it’s doubtful that it will even be a full percentage point. And, depending on the mechanisms that will be structured to make the secondary mortgage market work, any increase could be barely noticeable.
But Freddie and Fannie had a great run. There was a time when their stock was perceived to be on par with Treasury bills. For example, banks are required to keep a certain percentage of their assets liquid, i.e. cash, U.S. government securities and the like. The idea being that, if needed, these assets constitute immediate cash money for at least face value. The stock of the GSE’s was considered as good as cash for liquidity purposes.
Of course, everybody found out it wasn’t. The government stood behind the mortgages, but not the companies (and was never obligated to). It left a lot of people, including many banks, looking around for their shirts, which seemed to have disappeared from off their backs.
Pat Dalrymple is a valley native. He’s been in the mortgage and banking business since 1961. He’ll be happy to answer your questions or hear your comments. His e-mail is email@example.com.
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