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Guest Post: Should Fannie Mae and Freddie Mac Get Out of the Mortgage Business?

by Chris Adams on April 9, 2012

Fannie Mae and Freddie Mac, the two mortgage giants who fell under government control in 2008 after the housing market and economy both crashed spectacularly, are under fire yet again – this time by consumers who say they should just get out of the mortgage business altogether.

A pretty sizable majority of people polled – 72% – said they believe the two government-sponsored entities should stop buying mortgage loans from banks and other lenders. The rest said they should continue to be active in the mortgage market.

Fannie Mae and Freddie Mac, since their inception, have served as a way to keep cash flowing in America’s financial system (chiefly in its housing market) by purchasing home loans originated from banks, credit unions, and mortgage lenders across the country. By buying a loan worth, say, $100,000 from a bank, Fannie Mae and Freddie Mac basically free up $100,000 to be used by the bank for another loan – thus keeping the housing market liquid and allowing more people the chance to obtain loans and purchase homes.

This system worked fairly well until 2008, when the two GSEs fell under government control. Now, they have been roundly criticized from consumers and analysts alike for their role in causing hundreds of thousands of foreclosure properties to hit the market, as well as facilitating the rise of the housing bubble that popped disastrously five years ago.

Congress and the Obama administration have both actually attempted to find ways to either reform or replace Fannie Mae and Freddie Mac; perhaps the most serious chance at reform came with the passing of the Dodds-Frank Wall Street Reform and Consumer Protection Act in 2010 (see PDF). Unfortunately for some critics, that law failed to address Fannie Mae and Freddie Mac, ostensibly because doing so would have made the law much more difficult – and perhaps impossible – to pass.

To this day, Democrats on Capitol Hill have arguably been the most reluctant to substantially reform Fannie Mae and Freddie Mac, even if it were clear exactly what changes should be made to the agencies. The fact that no clear, cogent proposal has been tendered and seriously considered means holding the two agencies accountable for their alleged roles in funneling foreclosure listings into the market is not in the cards at the moment.

Will the two GSEs get out of the mortgage industry any time soon? Probably not – and until a clear, bipartisan proposal is offered, that possibility is distant, no matter how popular it may be.

Guest Author

John Evan Miller has been providing readers with insightful and informative foreclosure and real estate related news for over a decade; he is the head writer at ForeclosureDeals.com.

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