With the recent election results and the increase in Republican politicians promising to abolish Fannie Mae and Freddie Mac, the topic of what will replace these government sponsored entities is being discussed now more than ever. Fannie and Freddie have been in a state of uncertainty since the government seizure but a recent Wall Street Journal article appropriately asked what would replace them.
Fannie and Freddie played key roles in the prevalence of 30-year fixed rate mortgages by purchasing these loans from banks who liked to have them off their books. Fannie and Freddie guaranteed the loans the loans they purchased and sold them to investors as securities. According to a recent report by Standard & Poor’s, however, the cost to rescue Fannie and Freddie could reach $280 billion. The cash necessary to keep Fannie and Freddie active does not compare to the projected $400 billion in capitalization that would be required for any entities replacing these two failing entities.
Mortgage investors, industry groups, and academics are currently putting their support behind government insurance for mortgages. Treasury Secretary Geithner supports a limited, but explicit, guarantee. Conversely, Representative Jeb Hensarling (R., Texas), disagrees stating that he did not see the reason for continued government guarantees and the use of 30-year fixed mortgages. Furthermore, Hensarling pointed out that other countries have succeeded in producing high-homeownership rates without government guarantees. Many other Republicans call for complete privatization of the housing-finance industry.
Joshua D. Carlson, Esq.