If Fannie and Freddie fail and shut down, you will not be able to get a mortgage for the next several years. This is not an exaggeration. Mortgage lenders depend on the ability to sell their mortgages to Fannie Mae; your average lender doesn't have enough resources to keep all of them on its balance sheet. A huge number of investors buy the mortgage backed securities Fannie Mae issues because it's one of the biggest, most liquid, most transparent, and safest markets in the world. (And traders like me depend on it for their livelihood...) If that market disappeared, mortgage lending in the US would freeze.
What, so people.. might start to use smaller providers, or perhaps as things used to be, make agreements with the sellers themselves in a kind of rent-to-buy agreement?
Good lord, whatever will happen. Poor, POOR traders. Frankly, I could give less than two shakes on whether you depend on it for your livelihood. It's besides the point.
Their primary business is to help people get homes. Or at least, it should be. Not to make money for traders.
Ah yes, the difficulty of sarcasm over the Internet. All kidding aside, you're absolutely right that Fannie and Freddie shouldn't care about whether banks earn money trading mortgage bonds. I didn't mean to imply that banks, traders, or any other mortgage market participants deserved special treatment from the government, because they don't.
Fannie Mae, Freddie Mac, and to a lesser extent Ginnie Mae play an important role in the mortgage market, and it's worth thinking twice before saying they should be allowed to go under. The market in their mortgage-backed securities (MBS) has led to substantially lower mortgage rates, to easily refinanceable mortgages, to a wide variety of types of mortgages: fixed year mortgages of all time periods, ARMs, balloons, etc. And while things were certainly taken too far, the government mortgage agencies allowed many deserving homeowners to take out mortgages that individual banks wouldn't have been willing to give. I don't think it's in the best interest of the country to go back to the old model of mortgage origination.
That being said, I do think that Fannie and Freddie should really change the way they do business. Right now they perform two roles: that of a monoline (i.e. an insurance company), and that of a REIT. The monoline is what's important: by buying mortgages, taking a cut of the monthly payments as an insurance premium, and then packaging the mortgages in easily tradeable securities, they promote a smoothly functioning mortgage market. The REIT part is where they borrow money at extremely advantageous rates and invest it in their own MBS, like the original article talked about. The idea behind letting them operate as a REIT is that by buying large amounts of MBS, they would support their price, promote lower primary mortgage interest rates, and make housing cheaper for the nation as a whole. That's fine as far as it goes, but there should be stricter requirements on the size and riskiness of its portfolio. Earlier this year when private mortgage funds like Carlyle and others were blowing up, Fannie and Freddie should have been required to raise more capital and reduce purchases of new mortgages. But they weren't, and now we're in the mess we see now.
Think about the impact it would have on everyone else though. These companies aren't small companies. They're huge conglomerates that play major parts in peoples financial situation.
Sometimes taking risks is the best way to profit. And they're not called risks for no reason. And I doubt the company wanted to lose money intentionally..
The problem is these companies, with the implicit backing of the federal government take unnecessary and huge risks knowing they will be bailed out if they fail.
It's not "risk" if they only profit from the upside and don't take their medicine on the downside. Heads they win, tails you lose. :)
It isn't fair to paint Fannie/Freddie with the same brush that you'd use for (say) Bear Stearns.
These guys have been serving as the de-facto buyer of last resort for all of the bad debt that other banks have accumulated. They're acting as the US mortgage-banking safety net, and as such, have knowingly taken on a huge amount of bad debt that other commercial banks wouldn't touch. If it weren't for Fannie/Freddie, the mortgage crisis would be much worse than it is.
(That said...if they had the good sense to raise their lending standards back in 2003, we probably wouldn't be in this mess.)
Actually if it weren't for the actions of Fannie/Freddie, the mortgage crisis would have needed to be dealt with sooner. By F/F taking on all the toxic loans that the mortgage banks wanted to dump, they allowed the problems to increase in size and scope thus prolonging the bubble much longer. All this quasi-government intervention does is to distort the true market. I want transparency in government and I want it in business. When you allow these mortgage banks to fail on their own (no safety nets), you clear the system of inefficient players and allow the market to adjust.
I'm all for free enterprise. You take risks, you make some smart moves, and you profit. You take another risk, you make some mistakes, you lose, and you can start over (and learn). You don't keep doing it like these banks did (I don't even know if you can call them mistakes, more like reckless disregard). Like degenerate gamblers who got their line-of-credit extended, they double-downed and lost.
Think about it, the average US citizen's safety net is quite small. Get sick, get dropped by insurance, lose your job and you're basically on your own. We're told to buck up, stop whining, take responsibility, and work harder. Fine, but don't tell me these companies need our sympathy and help. They profited handsomely during the run-up by making risky loans and lobbying for tougher bankruptcy laws.
There's no easy answer. Bail them out, the dollar plummets and the economy goes to shit. No bailout, the financial market freezes up and the economy goes to shit. I'm leaning towards no more bailouts. At least then we might be able to address the root cause, which I think was reckless risk taking and financial engineering, with the perpetuated belief that the US government (tax payers) would be the ultimate safety net.
Taxes. Someone has to pay for the government bailing them out. And because it is essentially a blank check with no oversight, they'll make the mistakes again. And again. And again.
There's a reason it's called "risk". Because you have a chance of FUCKING IT UP!
Well, exactly. For example, I am English. This means that I am a shareholder in a bank. How does this follow? Because the UK govt spent 50 billion pounds (about a hundred billion dollars) of taxpayer's money bailing out a subprime mortgage lender called Northern Rock. 50 billion pounds is an awful lot of money - it's about double the annual defence budget. Now, I'm not even a Northern Rock customer, I'd be happy if they'd gone bust because that, while a bitter pill for some, would have brought some sanity back to the housing market (yes I am a homeowner). Instead, we have this huge debt on our collective hands.
If you don't have enough cash on hand to buy a house, you may well want to wish the opposite. Or if you hold a mortgage today, you definitely should wish the opposite -- most folks don't have enough cash on hand to cover the average coupon, which would in most cases put the seller in default as well.
