Home > Mortgages > Getting Government Out of Fannie and Freddie

Comments 0 Comments

FannieMae_futureatlas.com_CCFLickrThe government finally weighed in on three proposals to try to end government support of the mortgage industry. The big question is: Can the U.S. housing market manage to get healthy without government support?

It might be interesting to look back at the 70-year history of the government’s support of the housing industry through easier financing.  Back in the 1930s during the Great Depression, banks would only lend on short-term mortgage loans, and of course that made foreclosures more likely when the loans became due.

[Article: Government May Owe $8.4 Billion on Fraudulent Loans]

The government stepped in and created the Federal Housing Agency, now a part of U.S. Department of Housing and Urban Development. In later years the Government Sponsored Entities, GSEs, Fannie Mae and Freddie Mac were created. The rationale for the creation of all these entities was to assure the availability of 30-year fixed rate mortgage loans.

I believe that the time has come to end this government subsidy of the 30-year fixed rate mortgage.  To support this contention, let me lay out the damage that reliance on this loan has caused.

The Other Side of the Coin

While long-term fixed rate mortgages are attractive to homeowners, it has also led to the collapse of the Savings & Loan industry. In the early 1980s, the S&Ls had billions of dollars of low-interest rate loans on their books. Loans that yielded, say, 6%.  However, we had an unanticipated wild swing in rates starting in the Carter years.  This graph shows how high the rates got.  In order to attract deposits, the S&Ls had to pay much higher rates, like 15% to their depositors. You can’t receive 6% from your loans and pay your depositors 15% for very long before you go out of business. The industry basically vanished.

Note that this wasn’t the fault of the S&L management. They were suddenly faced with unanticipated volatility in rates that were due in part to the impact on the economy that resulted from an increase in the price of oil. Here’s what that graph looks like.

[Credit Card Roundup: The Best Secured Credit Cards]

In the early 1990s after rates fell back to single-digit rates in 1991, the S&Ls were gone and we witnessed a significant expansion in the market of Fannie Mae and Freddie Mac (F&F). The story was that the S&Ls failed because they couldn’t handle the volatility. So F&F were instrumental in providing money for loans.

Mortgage originators dealing with borrowers could create loans in the “Primary Market” and sell them to F&F. The money from this sale would go back into the originating banks where it could be lent again. F&F would pool these mortgages and sell them in the “Secondary Market” to the ultimate investors who wanted fixed income securities with a higher yield.

Next: Achilles’ Heel »

Image: www.FutureAtlas.com

Pages: 1 2

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other sponsored content on Credit.com are Partners with Credit.com. Credit.com receives compensation if our users apply for and ultimately sign up for any financial products or cards offered.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team