Fannie Mae and Freddie Mac have returned to the headlines over recent weeks as the debate over their futures have picked up some momentum. Some suggest that these entities were responsible for the housing market crash and consequently should be abolished. Others suggest that these government sponsored entities play a key part in housing market liquidity and that we need them to maintain stability in the markets. Whether you’re a consumer, bank, mortgage broker or an investor, you probably played a part in the entire housing boom and bust.
The federal government is partially responsible for easing lending standards, pushing adjustable rate mortgages, and consequently inflating the housing market in an effort to increase home ownership in America. Increasing home ownership sounds like a good thing but, in the end the costs were devastating to our economy. Fannie and Freddie are/were essentially victims of moral suasion and ultimately, were left holding the bag. This was a perfect example of “good intentions gone wrong” and to some degree, the cycle is starting over again with the government pushing HARP/HAMP programs. Although, these programs are designed to reduce requirements to help people save their home rather than speculate on a home they may not be able to afford.
The consumer was/is partially responsible for overextending their financial resources with an infinite number of individual goals and needs for borrowing. During the boom there was an abundance of cash available from home equity for paying bills, purchasing vehicles, or even investment properties. Once the tides turned, access to money dried up almost overnight and the many consumers started to run into financial trouble.
The banks and mortgage brokers were partially responsible for pushing products (like ARM’s) that many people didn’t thoroughly understand the risks of. Some of the mortgage brokers didn’t even understand the actual risks at the time but, did they do anything wrong per se? In most cases, they were doing their job and helping people with their housing finance needs. Could they have done a better job? Maybe.
Fannie and Freddie were doing what they were supposed to be doing by purchasing portfolio’s of loans from banks, securitizing the portfolios and selling them as mortgage backed securities to investors. Fannie and Freddie were essentially doing what they were supposed to do as well.
In the end, we should ask ourselves who was guilty of the collapse?:
1) the consumer, wanting to borrow large amounts
2) the mortgage broker, wanting to sell loans
3) the bank, wanting to sell loans
4) Fannie/Freddie, wanting to repackage and securitize your loans
5) the federal government, wanting to increase home ownership in America by easing standards
The answer is all of the above. All of us are guilty but you know how we love to find a scapegoat or a “witch trial” to pass on blame in our great nation. In the end, this is about people needing to take more personal responsibility for their own actions, whether at home, work, or in public. The lack of responsibility occurred at all levels and the problem wasn’t a greedy bank or government sponsored agency, it was all of us.
With all the new banking regulations in place, I am of the opinion that the government has done enough in the interim to reverse and potentially prevent another housing bubble and subsequent collapse. It is more difficult to purchase a home now than prior to the market collapse and the current lending standards are probably where they should have been 10-15 years ago. If Fannie and Freddie are removed from the housing market equation, our nations credit markets would face substantial liquidity strains and we would risk stalling the housing recovery.
So the answer to the question “should Fannie Mae go away?” is a resounding No Way!
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