Fannie Mae and Freddie Mac's future

[defendandprotect]

Fannie Mae and Freddie Mac's futureIf the US government continues to underwrite the mortgage market, then the one thing it should not do is pad banks' profits

Dean Baker guardian.co.uk, Monday 23 August 2010 14.00 BST

The administration took its first step toward resolving the final status of Fannie Mae and Freddie Mac with a big conference at the White House last week. In keeping with its housing policy to date, it seems intent on taking the worst possible course.

These mortgage giants have played an important role in making housing more affordable in the United States. Fannie Mae created the secondary market in mortgages when it was established as a government-owned company during the New Deal. Its willingness to buy mortgages from banks essentially created the basis for the 30-year fixed rate mortgage that is the standard today.

The virtue of the original Fannie Mae was that it was simple and cheap. It bought and held 30-year mortgages. It did not securitise them. This avoided the costs and risks associated with securitisation. At every step in the securitisation process, the financial industry expects to make money, and often lots of it, since salaries are so bloated. In addition to saving these costs, a public Fannie also had no incentive to engage in risky gambles to inflate profits. Its senior management was paid civil servant wages, not the tens of millions that go each year to top Wall Street executives.

-------------------------


Once again, the administration is failing to push for the necesary government reforms --

leaning once again to measures which benefit private interests.

[Igel]

1. They didn't securitize?

"Fannie Mae first ensures that the loans it acquires generally meet its credit quality guidelines and then it securitizes the pool of mortgages. The loans are converted -- or securitized -- into more liquid, flexible instruments. The resulting Fannie Mae MBS carries a guarantee of timely payment of principal and interest to the investor, whether or not there is sufficient cash flow from the underlying group of mortgages. Fannie Mae's obligation under this guaranty is solely Fannie Mae's and is not backed by the full faith and credit of the U.S. government."

Note the source of that quote:
http://www.fanniemae.com/mbs/mbsbasics/market/structure.jhtml?p=Mortgage-Backed+Securities&s=Basics+of+Fannie+Mae+MBS&t=Basics+of+MBS+Market+%26+Pools&q=MBS+Structure

Apparently Baker knows more than Fannie Mae does about Fannie Mae. In fact, they were early leaders in producing securities based on mortgages. It allowed them to buy up a lot of loans and then sell them in little pieces--which allowed them buy more loans. They set the pattern. Banks copied them, then innovated new kinds of securitization.


Fannie Mae and Freddie Mac should have been reviewed and revised in 2003. Failing that, in 2005/6. Too many people were too deeply connected with them at the time, and by the time the benefits of revising their role was evident it was too late.

[hfojvt]

2. note what Baker wrote "the original"

Fannie Mae was started in 1938 and privatized in 1968. http://en.wikipedia.org/wiki/Fannie_Mae