The housing market has enjoyed steady growth during the past two years. It was brought to its knees from an economic meltdown which started in 2007, so today’s news by President Obama regarding the housing recovery was received with reserved optimism. Surprisingly to some was his comments supporting the dismantling of industry giants; Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal National Loan Mortgage Corporation)?
Bipartisan Support and Commitment for Consumers
He is seeking bipartisan support should the dismantling become a reality. In addition, he is seeking a commitment that consumers will still be afforded low-cost mortgage money for their purchase or refinance transactions.
The importance of the announcement today is pretty straightforward. The meltdown affected consumers, organizations and companies who relied on the economy as part of their metric. Mortgage lenders were imploding like never seen before, Fannie and Freddie were running up historic losses to deal with all the mortgages which were sucked into the foreclosure vacuum.
As a stop-gap measure Congress approved a taxpayer bailout to get them back on their feet. There was plenty of blame to go around why a bailout was needed, however there was also a consensus that taxpayers or the government should be careful to never place themselves in the precarious position in assuming such a large risk. The bailout was huge but fortunately both organizations have paid back their loans.
As expected the experience was fodder for political debates. However President Obama as well as industry executives understand that it might sound easy to eliminate institutions which may appear outdated or no longer useful, but they also realize there currently is not a conduit to fill the housing hole if they were to disappear.
History of FHA, Fannie & Freddie
When the crisis erupted in 2007, it was likened to the Great Depression of the ‘30’s. One of the lessons learned from the Great Depression was the need to create a vibrant middle class. In 1937 FHA was created with the focus of creating home ownership.
As part of obtaining affordable mortgages, shortly thereafter, in 1938 Fannie Mae was created to complement FHA. The housing market took off and in 1970, Freddie Mac was created so that consumers had a choice of government insured or conventional mortgages. All three institutions are quasi-government operated since they rely on taxpayer funding for a portion of their operations.
Obama, “End Fannie Mae and Freddie Mac’s failed business model so taxpayers are never again on the hook for bad loans and bailouts.”
As the economy improved in 2009, some politicians barked for the dismantling of any companies relying on mortgage protection. The chatter reached fever pitched levels in January 2011, following the GOP regaining control of the House of Representatives. A key component of their ideology is removing or minimizing government involvement. Their plea is to privatize as much as possible. Further they insist the market should control rates and prices. Therein lies the political stalemate because the housing industry is an important part of the economy.
Any significant increase from current market rates could be devastating to the recovery. That is why the President agrees, Fannie and Freddie should be dismantled, but only if there are solid assurances consumers can obtain affordable mortgages. Until that happens, it will be business as usual.