Fannie Mae and Freddie Mac’s Uncertain Future

Fannie Mae and Freddie Mac have been in the news often lately–and an interesting article in today’s New York Times touches on some of the challenges the agencies face that could make headlines in the future.

The article illustrates why the mortgage market needs both companies, and discusses why it’s in danger of potentially losing them. (Given today’s announcement that Fannie Mae posted a more than $2 billion first quarter loss, that concern is more timely than ever.)

And although the government has relied on both companies to help bail out the mortgage market, its close ties to Fannie and Freddie certainly aren’t making anyone feel very comfortable about the prospect of either collapsing.

As the article says, Fannie Mae and Freddie Mac have benefited from their government backing–both were allowed to borrow money at lower interest rates because of it, and their profits soared as a result. From 1990 to 2000, their stock increased more than 500 percent.

But since then, things haven’t been as rosy:

  • Top executives were replaced; Fannie and Freddie had to pay hundreds of millions in penalties, the Times said.
  • Congress-determined affordable housing goals were met by purchasing large amounts of subprime and Alt-A mortgages; but when the housing market went bust, Freddie and Fannie had a $6 billion loss in the fourth quarter of last year.
  • Executives were granted the right to increase their investment portfolios last year in exchange for their help stabilizing the market by buying subprime mortgages; in March, they both said they would raise more capital this year, and got an extra $200 billion in purchasing power.
  • And in April, because they promised to further assist the housing market, Fannie Mae and Freddie Mac’s mortgage cap was increased to $729,000. 

But Fannie Mae and Freddie Mac are dealing with serious issues. They’ve posted huge losses this year, and may still have as much as $19 billion in additional losses they haven’t dealt with, according to analysts.

And, the Times says, they’re banking on the housing market turning around in the next year and a half. If it doesn’t, and home prices fall further, their losses could increase.

It doesn’t sound like a hugely stable situation–yet we need Fannie Mae and Freddie Mac more than ever.

They are the biggest collective source propping up the ailing mortgage market: The agencies handled more than 80 percent of the mortgages investors purchased in
the first quarter of this year, according to the Times.

Lose Fannie Mae and Freddie Mac, and the already rocky lending situation–just today, a Federal Reserve report said that the number of banks that had tightened lending requirements for corporate,
commercial real estate, home mortgage, credit card and other consumer
loans had risen close to historical highs–could go from bad to worse. Home prices could fall further; lending could become even harder to come by.

Which is why some lawmakers are concerned–but not willing to give up on the companies.

"I
want these companies to help with affordable housing, to help
low-income families get loans and to help clean up this subprime mess," Representative Barney Frank, a Massachusetts Democrat and the
chairman of the House Financial Services Committee. "Otherwise, why
should they exist?"

Good point … but the more pressing question is, can they continue to exist?