May 29, 2017 | Barcelona, Spain
Fannie Mae and Freddie Mac are two initiatives created by United States Congress that attempt to ensure reliable and affordable supply of mortgages to all US citizens throughout the nation. It’s important to note that the two are different entities that work together.
Fannie Mae, also known as the Federal National Mortgage Association (FNMA), is government-sponsored and publicly traded company that first came about after the Great Depression as a part of the New Deal. Its goal is to expand the secondary mortgage market by securitizing mortgages in the form of mortgage backed securities. This allows the lenders in the market to reinvest their assets into even more lending and increasing the overall amount of lenders in the market. Freddie Mac, or the Federal Home Loan Mortgage Corporation, was created in 1970 to expand the secondary market for mortgages in the US. Freddie Mac buys mortgages from the secondary market, then sells them back to investors on the open market as mortgage-backed securities.
For years, the two worked together and seemingly helped the housing market as it allowed for more people to buy homes in the US. Financial institutions no longer had to bear the burden of holding onto the mortgages they originated, but could sell them into the secondary market shortly after. This worked well for years, until eventually the housing bubble burst in 2008. As government sponsored entities, Fannie and Freddie created a false perception and sense of trust among investors, allowing Fannie and Freddie borrow money in the bond market at lower rates than other financial institutions. Rivals of F&F on Wall Street began heavily investing in the portion of the mortgage market that the federal government had reserved for the organization. Eventually, the housing market crashed as home prices began to stagnate and fall, drastically increasing risk of mortgage defaults among homeowners. All the homeowners with large amounts of equity could just refinance out of their mortgages into another with low initial payments. When the housing bubble finally burst, so did all the risk models and F&F’s portfolios.
In my opinion, the failures of Fannie and Freddie fall mostly on U.S. Congress. As a government sponsored entity, these institutions should be the most stable and heavily regulated. They were supposed to serve as solutions to the housing market by allowing more Americans to purchase homes at affordable mortgage rates. Instead, driven by greed and what could even be considered corruption, Fannie and Freddie screened American investors from overly confident debt and credit guarantees that carried way too much systematic risk. Ultimately, it was the U.S. taxpayers that took the burden and had to pay for the mistakes of a government-sponsored entity.
Figures above shows the immense debt issued by companies and the large percentage retained in their portfolio.