We admit it.
It’s hard for us to keep our eyelids propped open when Fannie and Freddie are brought up. We’re sure we’re not alone.
Yet the government controlled mortgage giants are once again in the news, with the Obama administration’s recently unveiled aproposal for winding them down. And given that this is MarketBeat, we figured we we should say something about these two crucial cogs in the not insignificant $10.6 trillion U.S. mortgage market.
So we figured we’d try to tell the story of Fannie and Freddie through some of the great charts The Journal has cobbled together in recent years on the two GSEs. The idea here is not that all the numbers will be completely up-to-date. (They can’t be. These charts are from older stories.) But we just want to try to make sense of the Fannie and Freddie mess for you.
But first things first. Exactly what do they do? The Journal’s Nick Timiraos, who covers Fannie and Freddie seems to have the best plainspoken explanation we’ve seen:
For 40 years, the housing-finance system has featured a blend of public and private entities. Fannie and Freddie buy mortgages from banks and other originators, repackage them for sale as securities and make investors whole when borrowers default. Investors long assumed the two shareholder-owned firms had an implied federal guarantee, which let them borrow at below-market rates and facilitate 30-year fixed-rate loans.
So what happened? Where to begin? Well we could go all the way back to the early 1930s when the U.S. first started getting involved in housing finance. (There’s a great timeline on page 10 of this report.)
But let’s just start during our recent housing mania. During the housing boom, Fannie and Freddie, which were publicly traded private companies — albeit with a fairly obvious backing of the Feds — began losing market share in the profitable business of buying up loans, packaging them up into securities and selling them off to investors.
The Journal reported that two companies, seeking to regain lost market share, loaded up on riskier subprime and Alt-A loans in 2006 and 2007 just as the housing market was starting to tank. As people began to have trouble paying their loans, some pretty ugly losses began to show up for Fannie and Freddie, like this.
Given the importance of Fannie and Freddie to the financial system — like other large banks such as Citigroup, et al. – the government didn’t let them collapse. As a result the bailout of Fannie and Freddie became a sizable part of the bailout mania of recent years. Check out this chart from April 2010.
Now, as this particularly ugly recession got underway the flow of cash from to borrowers — channeled through loans in the form of mortgage backed securities — dried up almost completely. Nobody wanted to go near the mortgage market given how ugly housing looked.
In fact, the only way investors appeared to willing to loan money for mortgages was if those bonds were backed by Fannie and Freddie, essentially the government. As a result, Fannie and Freddie — as well as Ginnie Mae, another government agency — now essentially backs the entire U.S. mortgage market. You can really see the private market disappearing in this chart.
And here’s a little fresher look, just at the government share.
Meanwhile, Fannie and Freddie have required huge injections of cash. Here’s a look from back in 2009:
Obviously this isn’t a sustainable situation. But with the economy looking pretty weak, at least until recently, there’s been plenty of reason for those in Washington to avoid rocking the boat. For instance, the government can use their mortgage buying ability to help keep mortgage rates down.
That may be helpful to the economy in the short term, but again no one thinks it’s sustainable in the long term. But here’s the problem, there just ain’t enough cash in the U.S. banking system to keep the mortgage market as big as it has been. That’s the reality.
But politicians know facing up to this reality would be expensive and painful for people. It’d get harder to borrow to buy a house. And it essentially it’d mean the American standard of living would go down. Not something anybody in Washington wants to see happen.
Hope that helps.
by Matt Phillips The Wall Street Journal February 11, 2011
