Introduction
Fannie Mae and Freddie Mac are government-sponsored enterprises facilitating mortgage financing for Americans. Mortgages aren't originated or serviced by either company. Instead, they make their money through purchases and guarantees of mortgages on the secondary mortgage market. Before the 1990s, these two companies dominated the secondary mortgage market. As the federal government increased its oversight and passed new laws allowing banks and financial institutions to merge, traditional businesses emerged as a potential threat. Fannie Mae and Freddie Mac Bailout continue to control the secondary mortgage market in the United States, despite concerns that they are too big to fail.
What Is Fannie Mae?
In the early 20th century, many Americans were financially unable to purchase a home. Almost one-quarter of American homeowners went through foreclosure during the Great Depression, creating a real housing crisis. 6 In 1938, Congress created the Federal National Mortgage Association (FNMA) to meet the growing need for reliable home financing (also known as Fannie Mae). Consequently, the market saw the introduction of long-term fixed-rate mortgages with the option to refinance.
What Is Freddie Mac?
The Federal Home Loan Mortgage Corporation goes by the moniker "Freddie Mac," but its full name is the Federal Housing Finance Agency. The Emergency Home Finance Act of 1970 mandated the formation of the secondary mortgage market to increase the supply of mortgages and reduce banks' vulnerability to interest rate risk. It was reorganised and converted into a shareholder-owned company by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. (FIRE). Freddie Mac was created for a purpose similar to that of Fannie Mae: to increase liquidity in the secondary mortgage and MBS markets via purchasing loans from conventional lenders like banks, thrifts, and credit unions. Whereas Fannie Mae typically purchases mortgages from large commercial and retail banks, Freddie Mac obtains loans from more minor, locally focused financial institutions like thrifts.
The Bailout Cost to Taxpayers
A report by the independent economic group Shadow Open Market Committee estimates that maintaining Fannie and Freddie has cost taxpayers US$187 billion over time, with the Treasury paying $116 billion for Fannie and $71 billion for Freddie (SOMC). In August 2012, the Treasury decided to redirect all profits to their fund instead of taking the standard 10% dividend. As of 2019, the bailout has been repaid, and SOMC has made a profit of $58 billion. Fannie contributed $147 billion, and Freddie paid out $98 billion. Compared to the $2 trillion spent on Fannie Mae and Freddie Mac, the $132 billion spent on the savings and loan crisis in 1989 looks like pocket change. This bailout started relatively modestly, at $85 billion, but quickly grew to $182 billion, mirroring the AIG bailout of 2008.
While the U.S. Treasury reports that $444 billion had been spent on TARP by April 2021, this is a drop in the bucket compared to the $700 billion bailout of the U.S. banking system in 2008. Fannie Mae and Freddie Mac, and by extension, the American housing market, were saved because of this rescue. The government reserves the right to reacquire up to 79.9% of Fannie and Freddie stock at any time. Unfortunately, they haven't cashed in on that warrant yet, so they're still owned by the stockholders who issued them. The federal government has limited control over budget of Fannie Mae and Freddie Mac.
What Do Fannie Mae and Freddie Mac Do?
They share a similar charter, mandate, and regulatory structure. Mortgage-backed securities issuers and mortgage-buying investment firms acquire mortgages from lenders (MBSs). The money from the sale of the mortgage loans is then used to fund new mortgage loans. Consequently, this makes it easier for people to access stable mortgage financing.
Conclusion
In the United States, the mortgage market is regulated by Fannie Mae and Freddie Mac. Both companies purchase mortgages from numerous lenders, enabling individuals, families, and investors always to have access to mortgage financing. Interesting ripple effects from the COVID-19 situation have reached Fannie Mae, Freddie Mac, and 28 million homeowners. Because of the pandemic, the FHFA expected to have until the end of the year to find billions in additional funding to maintain the moratorium. That's on top of the $6 billion that had already been spent. Once the relevant agencies release their data at the end of the fiscal year, the entire scope will be known.
