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Back to the Mortgage Future

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If the government-sponsored enterprises Fannie Mae and Freddie Mac are siblings, Fannie is the older sister. The administrator of the Federal Housing Administration (FHA) chartered Fannie Mae on February 10, 1938. As part of federal efforts to revive the economy after the Great Depression, Fannie Mae’s goal was to create a secondary market for mortgage lending. Previously, mortgage lenders would hold onto their loans and only the highest creditworthy borrowers were extended credit. According to historical data compiled by the GSE, Fannie’s original task was to purchase, hold, or sell FHA-insured mortgages originated by private lenders. Later, after World War II, Fannie Mae was granted the authority to purchase mortgages guaranteed by the Department of Veterans Affairs.

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The 1990s were marked by steady growth and record revenue. That carried over into the new millennium, fueled by the surge in subprime lending. Amid mounting losses, Fannie and Freddie began to flounder. By September 7, 2008, the Federal Housing Finance Agency (FHFA), which had since replaced the OFHEO as the GSEs’ regulator, placed Fannie and Freddie into conservatorship.

And that’s where it’s been since. Fannie and Freddie have been an instrumental part of the government’s efforts to curb foreclosures, but the losses keep coming and many question whether Fannie Mae and Freddie Mac will ever emerge from conservatorship and go back into the shareholders’ hands.

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The brother and sister combination were once darlings of housing politics. With the government as a backstop, competition either departed or was trampled as the companies acquired more than $5 trillion in mortgages. For the first three quarters of 2009, Fannie and Freddie securitized 75 percent of all mortgages originated in the U.S.

But when the housing bubble burst, the giants hit the ground – hard. The amount of delinquencies in Fannie’s portfolio went from 0.79 percent in October 2006 to 5.29 percent through November 2009. Freddie’s delinquency rate increased from 0.54 percent in October 2006 to 4.03 percent in January 2010.

The options are limited, but for all the hot air and grandiose schemes, staying on the same road just might be the big secret everyone’s keeping.

Nationalization

One available option to the powers at be is to nationalize the GSEs. Congress would essentially merge Fannie and Freddie into one supergiant that buys mortgages from originators, packages them into mortgage-backed securities and sells the bundles to investors. Talk about too big to fail. The Fannie-Freddie monolith would hold more than $5 trillion in mortgages, more than any other bank in the world. Such a financial undertaking could be too big of a bite for a Congress and an Administration taking fire for overspending. ... Public-Utility Structure This is another option considered by some in Congress. Under the public-utility structure, banks or other private shareholders would own Fannie and Freddie, but would operate under federal regulation. They would still perform their roles, purchasing and securitizing mortgages, but sources point out that under this model, each would be prohibited from holding mortgage portfolios. ... Privatization or Death It’s unlikely because of political pressure and public dissemination toward securitization as a whole. Despite the public outcry, securitization funds the mortgage industry. Without it, there would not be enough cash to keep the mortgage market growing. Despite this unlikely scenario it’s one that many sources in the industry considers the best option -- that or getting rid of them all together.

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