You may have seen two sets of news reports last week that didn’t quite add up: First, President Obama called for the liquidation of Fannie Mae and Freddie Mac, the country’s largest providers of funds for home mortgages. Then a couple of days later, Fannie Mae announced its sixth straight quarterly profit and said it was sending $10.2 billion in dividends to the Treasury. Freddie Mac also reported a hefty profit — $5 billion over the previous three months — and said it is providing $4.4 billion in dividends to the government.
Both companies also summarized what they’ve been doing for home buyers and owners following their takeover by the federal government in September 2008. Given the president’s call for them to disappear, it’s worth taking a quick look.
Since January 2009, Fannie says it has provided funding for 3.1 million home purchases and 11.4 million refinancings of existing home loans. It has also helped 1.3 million borrowers who were behind on their payments and heading for foreclosure with loan modifications, workouts and other forms of assistance. It has already paid back $95 billion of the $116 billion in taxpayer funds the government loaned it, and could pay the rest sometime next year. It expects to be profitable for the “foreseeable future” as the result of the high credit quality of the new loans it’s making and because of declining losses on its existing mortgages.
Meanwhile, Freddie Mac has financed 1.8 million home purchases, 7.2 million refinancings and 872,000 loan modifications or workouts. As of next month it will have paid back $41 billion of the $71 billion in assistance extended by the government. Its 2.8 percent rate of serious delinquencies is far below the mortgage industry average of 6.4 percent. Both companies also provide significant financial support for rental apartment construction.
Wait a minute. Didn’t both companies go off the rails in the years immediately preceding the housing bust, investing in subprime and other loans that contributed to the severity of the housing bust?
No question. But here’s the point: The president and congressional critics want to dismantle Fannie and Freddie, but what’s to replace them? That’s a thorny political thicket. Not only is there no consensus on how to do it but little discussion of the potential costs for home buyers and owners. What would capital punishment for Fannie and Freddie mean to consumers?
Start with higher mortgage interest rates. Without the federal guarantees supplied by Fannie and Freddie, the costs of mortgages are virtually certain to rise. Economists at Moody’s Analytics estimate that dumping the companies and switching to a plan advocated by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., “would increase the interest rate for the average mortgage borrower” by one-half to three-quarters of a percentage point.
The Corker-Warner plan would usher in a mortgage marketplace heavily dominated by big banks and their Wall Street partners. There would be no direct federal guarantee on mortgage securities, which Fannie and Freddie currently provide. The primary risks would be assumed by lenders and investors. There would instead be a federal backstop insurance arrangement where investors could be covered in the event of catastrophic losses caused by an economic meltdown. The plan would be modeled after the Federal Deposit Insurance Corp., with participating lenders paying for insurance coverage.
On the House side, a competing bill sponsored by the chairman of the Financial Services Committee, Rep. Jeb Hensarling, R-Texas, would provide no federal backing for the vast majority of new mortgages — the Federal Housing Administration would survive but with heavy new restrictions. With not even a backup guarantee of federal insurance in the event of another mortgage crisis, banks would require higher interest rates from borrowers to protect themselves, and might also be hesitant to commit money for long terms at fixed rates, putting the widespread availability of 30-year mortgages in doubt. They’d most likely prefer shorter term, adjustable rate loans, which shift more of the interest rate risk onto the borrower.
The takeaway on all this: Fannie and Freddie have had their problems, but they’re now pulling in big bucks for the Treasury and still funding the bulk of American home loans under tight federal oversight. What replaces them matters — especially the retention of some form of federal guarantee to keep rates affordable. Dumping them precipitously in favor of a totally privatized mortgage market might sound attractive, but it would mean you’d almost certainly pay more when you need a home loan.
Kenneth Harney is executive director of the National Real Estate Development Center.