The FMIC: The Future of Fannie Mae and Freddie Mac

Some government officials believe Fannie Mae and Freddie Mac have outlived their usefulness, which has prompted one senator to introduce legislation that would essentially do away with them.
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Fannie Mae and Freddie Mac are both synonymous with home loans, and are publicly-traded Government Sponsored Enterprises (GSE). Fannie Mae was established as a part of FDR’s New Deal during the Great Depression in order to increase cash flow to local banks and improve home ownership rates. Freddie Mac was established in 1970 to increase the secondary market for mortgages. Some government officials believe these two organizations have outlived their usefulness, which has prompted one senator to introduce legislation that would essentially do away with them.

Bill in question

The proposed legislation was introduced by Senator Bob Corker (R, TN), who claims the two organizations are no longer needed. He claims that both Fannie Mae and Freddie Mac need to be “unwound” over the next five years, and has plans to replace them with a new agency that would be responsible for insuring mortgages but not holding them.

Corker’s legislation was prompted by the fact that taxpayers have put out more than $188 billion to “bail out” the two organizations. According to the senator, this has resulted in a “private gain, public loss” scenario, which he would like to move away from. The timing of his proposal is also noteworthy, since it comes at a time when the housing market is seeing its strongest increase in more than six years.

Proposed Changes

This bill would create a new agency, which would be known as the Federal Mortgage Insurance Corporation (FMIC), which would simply be a “reinsurer” of loans rather than a holder of them. The purpose of the FMIC would be to provide assistance only after private creditors had suffered a loss on a mortgage. Financing for the agency would come from fees on the lenders who stand to benefit from its services.

Bi-partisan support

The reform bill introduced by Senators Corker and Mark Warner (D, VA), thus far has been widely received by both Democrats and Republicans. His bill is currently being co-sponsored by a bi-partisan group of 10 senators, and is expected to serve as the base text for the Senate Banking Committee’s housing reform efforts. President Obama has recently called for similar efforts as well.

Corker believes his bill will have no trouble passing Congress, and claims it could be the “most important thing (they) do this year that actually matters.” He added “This is a too big to fail scenario if there’s ever been one.”

Affect on housing market

The proposed legislation would shift mortgage writing away from government entities and into the hands of private lenders. Economy.com reports that nine out of 10 mortgages are currently provided by either Fannie Mae, Freddie Mac, the Federal Housing Administration or the Veteran’s Administration. Government-backed mortgages account for more than $1 trillion in loans each year, and it is taxpayers who bare the risks associated with these mortgages. By doing away with Fannie Mae and Freddie Mac, Senators Corker and Warner are hoping to eliminate the possibility of another taxpayer bailout being needed in the future.

The role of the FMIC would be to “screen” the players in the housing market to ensure they “play by the rules.”They would also insure eligible mortgages in order to provide some security for private lenders who would now be assuming the biggest share of the risk.

A mortgage rate increase can also be expected if this bill is eventually passed. Economy.com claims there will be an approximate increase of around 50 to 75 “basis points,” which are essentially 1/100th of a percentage point, during the first 15 years. After that, the increase would be between 35 and 55 basis points. These figures are based on a conventional 30-year fixed rate mortgage in which borrowers achieve an 80 percent loan-to-value ratio and also have a credit score of around 750.

There are some definite advantages and disadvantages of the new law that’s been proposed by Senators Corker and Warner. Since it will likely result in slightly higher mortgage interest rates, yet decrease the amount of risk taxpayers face, the two could be a fair trade for one another.

Chad Dannecker is team leader of Dannecker & Associates. With more than 40 years of local real estate experience, Dannecker & Associates has established themselves as the leading source for condos in San Diego.