The pressure continues to privatize Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corp.), the government sponsored enterprises (GSE’s) that purchase home loans, then package them into mortgage-backed securities for sale to investors around the world. This activity has been a mainstay of the U.S. economy for decades, making trillions of dollars available for reinvestment in housing.
The big players in the financial industry, mega-investors like Black Rock and Fidelity Investment Management, are saying it’s a bad idea because U.S. government backing is essential to assuring liquidity in the marketplace, and to make homeownership as inexpensive as possible, thus bolstering the national, and world, economies.
That position does make a lot of sense, but does the American taxpayer have to stand behind the housing industry? Sure, owning a home is good, and shelter is essential, but does everybody have to stand a little bit in harm’s way to make it happen?
In reality, the U.S. Treasury — read “taxpayers” — has been on the hook since 1934, when the first national housing bill was passed. This legislation created the Federal Housing Administration, which insured long term residential mortgages, and everything since has flowed from that act.
The Servicemen’s Readjustment Act of 1944, the “GI Bill,” got the Veterans Administration into the housing business through its program of guaranteeing home loans for vets. Beginning in 1945, America’s suburbs were created, and the U.S. became a nation where more people were homeowners than renters, unique in the world.
From the end of World War II and the early ’60s, the majority of residential mortgages were either insured by FHA, or guaranteed by VA. The concept was working very well. At that time, Fannie Mae, which had been created by the 1934 Housing Act, was active, but not the systemic, major element that it is today. The entity wasn’t even the first choice as an investor for producers of home loans. Rather, those FHA/VA loans with a government guarantee were sold to long-term investors, such as mutual savings banks and insurance companies.
Freddie Mac was chartered in 1970 to provide a conduit for creation of securities backed by residential mortgages not guaranteed by FHA or VA, so called conventional mortgages. Major sellers to Freddie after its founding were the nation’s savings and loan associations. It wasn’t long before the distinctions between Freddie and Fannie became blurred, and then disappeared; they became mirror images.
So what would happen if the two were made private corporations, and the government backing, implied or otherwise, of their mortgage-backed securities ends? Any privatization plan will call for massive infusions of capital slated for reserves against losses. This could be as much as $180 billion, and it could very well be raised quickly through stock offerings. The conduit business, buying and packaging mortgages into securities, is very profitable, and investors would not be lacking.
FHA and VA would still be around with their federal guarantee. Securities backed by these loans would be the most desirable with a lower yield, meaning that these borrowers would get the lowest mortgage rate. Which makes sense: A lower house payment for families makes hard economic sense. If a homeowner can afford a million-dollar home, paying a bit of a premium to borrow part of the purchase price isn’t out of line.
If high quality underwriting standards prevail across the board, whether insured by FHA, guaranteed by VA, or, possibly, insured by private mortgage insurance companies, there should be no problem. That’s been proven over the past 75 years.
It’s an urban legend that banking and lending laws and regulations were deficient in 2008, thus leading to the housing crash and the Great Recession. Not so; there were plenty of regulatory tools to prevent production of toxic mortgages. But the tool box was mostly left locked. Highway speed limits make sense, but if the police cruiser is always parked in front of Dunkin’ Donuts, folks tend to go pretty fast.
There’s an old saying in banking, “We may make a bad loan, but we try not to make a loan badly.” If common sense loan approval guidelines are in place, at all levels of lending, U.S. mortgage-backed securities will continue to be a gilt edged investment.
If …
But human nature always raises its ugly head. In the early years of the 21st century, those in an oversight position — regulators, accountants, business executives and others — lost the keys to the tool box, and by the time they found them, it was too late. So everybody figured they’d pass along the risk to someone else: investment banks, Freddie, Fannie and, ultimately, the American people, and hope for the best.
Just about everybody knew the emperor had no clothes, but nobody could drop the dime.
Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is pdalrymple59@gmail.com.
