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TRUMP ADMIN UNVEILS PLAN TO END GOVERNMENT CONTROL OF FANNIE MAE AND FREDDIE MAC, WHICH BACK HALF OF THE NATION’S MORTGAGES
by Kevin Ryan
The Trump administration has just released a sweeping plan to end more than a decade of government control of two massive companies, Fannie Mae and Freddie Mac, which back half of the nation’s mortgages.
The long-awaited plan would resolve the fates of Fannie Mae and Freddie Mac, which eleven years ago this week were put into government conservatorship during the global financial crisis.
Fannie Mae is a government-sponsored entity (GSE) established by the U.S. Congress in 1938 as part of Franklin Delano Roosevelt's New Deal. Freddie Mac was established by Congress in 1970. Both companies purchase mortgages from lenders, and package them into securities to sell to investors. This in turn frees up liquidity for lenders to make additional loans.
In 1992, the Democratic Congress amended the charter of Fannie Mae and Freddie Mac to require them to “have an affirmative obligation to facilitate the financing of affordable housing for low- and moderate-income families”. For the first time, they were required to meet “affordable housing goals” set by the government.
In 1999, Fannie Mae came under additional pressure from the Clinton administration to expand mortgage loans to low and moderate income borrowers by increasing the ratios of their loan portfolios in distressed inner city areas designated in the Community Reinvestment Act. The initial annual goal for low-income and moderate-income mortgage purchases was 30% of the total portfolio, increasing to 55% by 2007.
At the time, The New York Times reported that Congress’ new mandate to push the corporations towards the subprime market required “taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporations may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s.”
Sure enough, when the economy entered into a recession in 2008, Fannie Mae and Freddie Mac were among the hardest hit entities. Taxpayers ended up owning both companies in 2008 when the housing market collapsed and the firms’ loses piled up.
Under the Trump administration’s new plan, Freddie would be turned back into private companies but would be required to pay taxpayers a fee for government protection. It would also open the market up to competitors for the first time.
The proposals will “protect taxpayers and help Americans who want to buy a home,” Treasury Secretary Steven T. Mnuchin said in a statement. “An effective and efficient Federal housing finance system will also meaningfully contribute to the continued economic growth under this Administration.”
Fannie Mae and Freddie Mac represent the last major unresolved business from the financial crisis. Both Democrats and Republicans support ending government control of the companies,
SOURCE: https://beta.washingtonpost.com/business/2019/09/05/trump-administration-unveils-plan-revamp-housing-market/
TRUMP ADMIN UNVEILS PLAN TO END GOVERNMENT CONTROL OF FANNIE MAE AND FREDDIE MAC, WHICH BACK HALF OF THE NATION’S MORTGAGES
by Kevin Ryan
The Trump administration has just released a sweeping plan to end more than a decade of government control of two massive companies, Fannie Mae and Freddie Mac, which back half of the nation’s mortgages.
The long-awaited plan would resolve the fates of Fannie Mae and Freddie Mac, which eleven years ago this week were put into government conservatorship during the global financial crisis.
Fannie Mae is a government-sponsored entity (GSE) established by the U.S. Congress in 1938 as part of Franklin Delano Roosevelt's New Deal. Freddie Mac was established by Congress in 1970. Both companies purchase mortgages from lenders, and package them into securities to sell to investors. This in turn frees up liquidity for lenders to make additional loans.
In 1992, the Democratic Congress amended the charter of Fannie Mae and Freddie Mac to require them to “have an affirmative obligation to facilitate the financing of affordable housing for low- and moderate-income families”. For the first time, they were required to meet “affordable housing goals” set by the government.
In 1999, Fannie Mae came under additional pressure from the Clinton administration to expand mortgage loans to low and moderate income borrowers by increasing the ratios of their loan portfolios in distressed inner city areas designated in the Community Reinvestment Act. The initial annual goal for low-income and moderate-income mortgage purchases was 30% of the total portfolio, increasing to 55% by 2007.
At the time, The New York Times reported that Congress’ new mandate to push the corporations towards the subprime market required “taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporations may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s.”
Sure enough, when the economy entered into a recession in 2008, Fannie Mae and Freddie Mac were among the hardest hit entities. Taxpayers ended up owning both companies in 2008 when the housing market collapsed and the firms’ loses piled up.
Under the Trump administration’s new plan, Freddie would be turned back into private companies but would be required to pay taxpayers a fee for government protection. It would also open the market up to competitors for the first time.
The proposals will “protect taxpayers and help Americans who want to buy a home,” Treasury Secretary Steven T. Mnuchin said in a statement. “An effective and efficient Federal housing finance system will also meaningfully contribute to the continued economic growth under this Administration.”
Fannie Mae and Freddie Mac represent the last major unresolved business from the financial crisis. Both Democrats and Republicans support ending government control of the companies,
SOURCE: https://beta.washingtonpost.com/business/2019/09/05/trump-administration-unveils-plan-revamp-housing-market/
