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  • Morning Bell: What if Fannie and Freddie Were Eliminated?

    For the past several years, it’s not been an uncommon sight in Anytown, USA, to drive down the street and see home after home for sale after going through foreclosure. They are the still-lingering hangover from the housing crash that began in 2007. Though the true cause of what burst America’s housing bubble is still debated, two of the culprits — housing finance giants Fannie Mae and Freddie Mac — are still going strong even though both essentially failed in 2008 and are under government control. Economists and politicians alike are now pondering whether we need Fannie Mae and Freddie Mac at all and what would happen if they were eliminated altogether.

    For several years prior to 2007, home prices went through the roof, but then they crashed through the basement. Since then, more than 2.3 million homeowners have faced foreclosure — an 81 percent increase over 2007. This all, of course, contributed to the Great Recession we’re still rebuilding from today. “Easy credit” is pointed to as the corrosive acid that ate away at the housing market’s foundation, and federal government-sponsored mortgage finance giants — the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) — were there to supply it and help other lenders to do so.

    Consistent with policies dating back to the Carter and Clinton Administrations, Fannie Mae and Freddie Mac made it easier for low and moderate income Americans to obtain mortgages and purchase homes. In a new paper from The Heritage Foundation, A Housing Market Without Fannie Mae and Freddie Mac: Effect on Home Prices, Nahid Anaraki reports that this “fueled an excessive expansion of credit in the housing sector, shifted the demand for real estate to the right, and caused home prices to overshoot their underlying market equilibriums.” In other words, Fannie Mae and Freddie Mac’s intervention in the housing market helped to fuel the boom-to-bust housing bubble by subsidizing interest rates and enabling reduced down payment requirements on single-family homes, thus unnaturally boosting demand and causing prices to go up.

    The trouble with all this, Heritage reports, is that though Fannie Mae and Freddie Mac have made it easier for a family to buy a home, in the long run their actions have a detrimental effect on the economy, as America has witnessed.

    So what would happen if Fannie Mae and Freddie Mac were phased out? Would the absence of their ability to offer lower interest loans and smaller down payments impact the cost of homes in America? Anaraki’s analysis shows that it would not. In fact, interest rates and changes in down payment requirements have little influence on housing prices. Instead, fundamentals–such as household assets, personal income, the S&P Index, and the effective tax rate–play substantial roles in shaping home prices. As such, she advises, it’s time for Washington to get out of the business altogether:

    The federal government should avoid offering any subsidy in the form of lower interest rates or lower down payments because it adversely affects both the housing market and the economy over the long term. Although such a policy may boost the demand side in the short term, it risks inflating another housing bubble in the medium or long term.

    Eliminating Fannie Mae and Freddie Mac, in fact, will help more Americans afford homeownership. Since these institutions increase demand — thereby increasing home prices — it becomes increasingly difficult for lower-income Americans to afford to purchase homes without subsidized interest rates. If Fannie Mae and Freddie Mac are eliminated, interest rates may slightly go up initially, but Anaraki finds that “higher interest rates will lead to lower median home prices, which in turn will increase the ability of low-income groups to purchase a house.” What’s more, competition among housing lenders would increase, leading to lower interest rates in the medium to long term.

    Owning your own home is the American Dream, but suffering a foreclosure and winding up on the streets is the American Nightmare. In pursuit of encouraging the former, the federal government helped produce the latter. Government intervention by way of Fannie Mae and Freddie Mac may have given more Americans the keys to their own homes, but they bought homes they could not afford and in a marketplace that could not be sustained. As Heritage showed in an earlier paper, Fannie Mae and Freddie Mac can be phased out without disrupting the housing recovery. A better way forward is to phase out Fannie Mae and Freddie Mac and let the home market find a healthy and sustainable equilibrium.

    Quick Hits:

    Posted in Economics [slideshow_deploy]

    63 Responses to Morning Bell: What if Fannie and Freddie Were Eliminated?

    1. Frank says:

      "What if Fannie and Freddie Were Eliminated?"

      That's the wrong question! The correct question should be: how soon can these Unconstitutional now 100% Federal Government backed entities be eliminated! Stop the Federal supports & let them go bankrupt as private entities. They are totally corrupt & worthless.

      • Guest says:

        Imagine our shock to find that our recent mortgage is now owned by Fannie Mae & Freddie –but the bill still comes from Wells Fargo. Who's responsible here?

        sarah

      • tickyul says:

        Haha, that ship sailed long ago.

    2. Back to Basics says:

      Why can we not bring another point in to the discussion on Fannie Mae and Freddie Mac? The Constitution. We degrade ourselves when we focus on the "how" of running yet another failed federal program. Our focus must be like a laser on the basic principles of the Constitution. Providing access to housing is NOT one of the ENUMERATED powers granted Congress by the Constitution, therefore, the Congress and the federal government have no right being involved at all. End of discussion.

      With pieces like the above, The Heritage Foundation is yet again taking the path of a frugal socialist.

      Heritage – where are your principles?

    3. Ken Jarvis says:

      The American Dream is to Own a Home.
      When has HF or the GOP ever tried to promote anything that benefits Americans?
      LVKen7@Gmail.com
      At least I have the guts to put MY Name on anything I write.

      • Bobbie says:

        That's very sweet of you to give us your name, Mr. Jarvis. But the American Dream is one's own and one's own ambition to achieve it. Forced by government rule isn't freedom!

        Freedom and self reliance benefits Americans, Mr. Jarvis! Have any?

    4. Joele Klein says:

      I say let Fanny and Freddie go.

    5. Donald H. Tiller III says:

      Good article in on the issue of demand that it addresses but it fails to address the other purpose of Fannie Mae and Freddie Mac which is to serve as the main players in the secondary market for residential mortgages. Regardless of the issues addressed in the article and the conclusions drawn therefrom, there is a major component to Fannie and Freddie that would need to be addressed to have a sound policy stance on its elimination in that we would need to know what the impact would be on the real estate market, and the mortgage market as a subcomponent, if these entities no longer existed to act as an immediate purchase of loans and packager to investors of loans originated by savings associations, commercial banks, mortgage bankers and all other mortgage market drivers. Without a secondary market to sell these loans they have to hold the loans and service them. This would deprive these entities of cash infusion from the sales of the loans
      to fund new loans. There is a solution that does not require Fannie or Freddie but there is more to the story than addressed in this article. We should have government related entities like these comprising such a massive market share but private business in the secondary market would need to step in and that wouldn't be immediate. There would be consequences in the immediate future. The solution is more complicated than just elimination but the federal government should not be in the mortgage industry and we need to find a suitable way of getting it out of this and many other private industry sectors.

      - Donald H. Tiller III

    6. Don Naeve says:

      In my opinion there are two other components to the housing debacle. Developers and home builders. Developers added to the soaring prices by multiple land purchases causing the home lot to be highly inflated. The home builder was happy to provide beautiful homes on postage size lots but with several thousand square feet of space. First time home buyers, young families were thrilled to be able to buy a 3 or 4 bedroom house with great features but as we now know they couldn't qualify for such amenities and went under. Builders and developers should have considered the market better and provided an adequate home for a reasonable price. Back in 1949 the housing market was beginning to boom with GI's needing places to live. Developers and home builders seized the opportunity to satisfy the demand. Our first home was less than 1,000 square feet, had 3 bedrooms, one bath, a pullman (narrow) kitchen, a large back yard with a clothes line for drying cloches. It did have a washing machine in the kitchen.

      My point is to provide young families a basic home with reasonable amenities and not the grand castle that was in such demand a few years ago.

    7. Lloyd Scallan says:

      That's all any person has to do is to go back and study how and why Freddie and Fannie became so powerful that they (or there co-conspirators) controled almost the entire housing market under the guise of the "American Dream". These crooks went up to Capital Hill with sacks of cash and bought Congress, on both side of the ilse. Does anyone really think that this Congress, this government, will allow these payoffs to be stopped?

    8. Barbara Stephens says:

      Fannie and Freddie need to be phased out. They have cost the American people too much money and oo many problems. Get rid of both of hem.

    9. don stampfli says:

      if fannie mae and freddie were phased out, who would be the secondary market be for banks to sell long term loans too? china for example?
      believe fannie and freddie can function as they were intended if congress will just quit placing impossible requirements/policies on them… a 'no qual loan' is a sure way to disaster.

    10. Herb Philbrick says:

      It seems to me this article is contains contradictions.

      Paragraph 3: Fannie and Freddie subsidized interests, reduced down payments. This boosted demand which, in turn, caused prices to go up.

      Paragraph 5: If Fannie and Freddie were phased out, Anaraki's analysis shows that the cost of homes would not be impacted.
      - – - – - – - – 5 says the opposite of 3.

      Paragraph 7: Since these institutions increase demand (via subsidized interest & lower down payment), demand and prices increase. Eliminating Fannie and Freddie would raise interest slightly. This would lower demand (from low income groups). Home prices would fall.
      - – - – - – - – !!!! and would this not lead to higher demand and thence higher prices????

      The full analysis has a quantitative model. Perhaps some of that output would clarify the relationships.

    11. FGordon says:

      Housing is not in the realm of the general government. Fannie and Freddie are Constitutionally illegal and should never have come into existance. They are not in the ENUMERATED [DELEGATED] Powers of The Constitution and any and all laws to create them are illegal. So ELIMINATE them! Start asking people in government if this and that are Constitutional and find out almost all of what the general government is doing is illegal. Get rid of all UNCONSTITUTIONAL laws and those that make them!

    12. Jeff Gardner says:

      My mother has been in the banking industry for about 45 years now. She has often told me that the Community Reinvestment Act was the worst thing that ever happened to the banking industry and especially to small, local banks who were forced to make loans to customers they knew were at risk of foreclosure before they even applied for a loan/mortgage.

      As I see it, the ripple effect from CRA is a large part of what has caused the credit crisis across the board. Fannie, Freddie and the CRA made it too easy for at-risk people to get mortgages. Once those people could get mortgages it put them in a position to get other types of credit. For instance, it was a big deal to have a credit card 30 years ago, and you had to have excellent credit to even be considered for one. Nowadays, they are being offered to college freshmen who've never worked a day in their lives! Credit should be reserved for people who have already shown themselves to be responsible, not as a tool to teach responsibility.

      With a mortgage being the largest loan that many people will ever have, it only makes sense that this is the place to start fixing the credit crisis. Fannie and Freddie are already on life-support with no chance of recovery. It's time to pull the plug!

    13. RogCol says:

      The wholle premise is bogus. Obama just gave them $2.1B from his "stash" to reduce the principle of many who are under water. Who in their right minds would take 30 year loans at around 30 years obligaion of 4%? Further, we all know that those homes will default shortly after they are subsidized, that may be the good part in this equasion.

    14. John C. Davidson says:

      I am glad to see that these two entities are being brought to the attention of all Americans. It should be the focal point of concerns for the very future of our present financial system. Continually propping it up will not avoid the inevtable results it will bring about.

    15. Stephen says:

      I have thought for a several years now that Fannie Mae and Freddie Mac should be eliminated, and the loans forgiven. What would it hurt? Who would it help? AT the same time close down HUD, another costly government boondoggle!

    16. Keith White says:

      The houseing and most of the economic downturn of 2008 was started by the Cinton administration and the progressive left instituting the entitlement society. They made the loans for houseing so lax that you didn't need a down payment, could make a loan with no job, no income exept food stamps and welfare. People bought houses that should never have been able to get a loan they could never pay back, This is a socialist attitude and should never have happened in the United States.
      NO ONE should be able to buy a home unless they have the means to make the payments and keep up the repairs that are ongoing. This means everyone needs a down payment and no loans that pay interest only ( wonder who the idiot was that put all this together.
      SHUT DOWN FANNY AND FREDIE and move our country back into a country with people that want to work and prosper and take care of themselves. Charity should come from the heart and not some government office that has a bunch of polititions in it, running it and that are scamming it.

    17. Ron Spunt says:

      Eliminating FNMA and Freddie Mac alone would solve nothing unless you somehow can create another Secondary Market. The only money that can be lent is money on deposit somewhere and without the ability to resell the loans in order to come up with more available funds to lend out, the Banks, S&Ls, REITs, Pension Funds, etc. would have on their books,, the supply of money would soon dry up. This was the original reason for the creation of these two giants.

    18. glynnda says:

      Okay agreed, however don't the people who signed on for a loan they couldn't afford or had no intention of paying back share some of the responsibility here? Didn't Fannie & Freddie require them to take classes on home affordability, etc.

      I think the real tragedy is for people who lost their jobs and subsequently their homes. Any update of regulations should include banks not being able to loan for homes as they do not have to be qualified as real estate lenders…..only mortgage companies or qualified banks should have this privilege. However I definitely agree that Fannie and Freddie should be shut down…..phased out….maybe as long as it takes no more than two years, enough time to get loans switched over to private lending companies and Freddie and Fannie to sell off their assets and pay back the government for all the wasted funding that has been dumped by a bunch of political suck ups in Congress……

    19. Dave says:

      Its the same idea with guaranteed student loans

    20. Here is my idea, have private banks and mortgage companies buy back the good and defaulted or troubled mortgages and take the ones that are in trouble and refinance them over fifty or sixty years. That would substantially lower the mortgage payments and the banks and mortgage companies could charge a higher interest rates to protect their risk. Each mortgage would come with a ten-year refinance clause. This would give the markets time to re-stabilize, give people time to get back on their feet financially and protect and allow the properties time to start increasing in value. If at the end of ten years if some of the people still cannot afford to refinance then they would be given a choice of either selling the property or allowing the banks or mortgage companies to reposes the property "without" giving them a bad credit risk.

    21. Daver says:

      Who in the GOP is working on this? This needs to be another presidential initiative.

      The only way to stop gov't abuse is to shrink the gov't.

      Yes Obama is not only a weak leader, but he is also lazy, so expecting him to provide oversight on anything is silly–but with a gov't employing millions of people it is also naieve that anyone could/would.

      Nowhere in the Constitution is anything that says the gov't can or should provide homes to people–yet that is exactly what Fannie and Freddie do, and all it leads to are problems.

    22. Oscar Brown says:

      Get rid of them. We cannot afford them, the market cannot afford them, the people they were supposed to help cannot afford them.

    23. Mike Canning says:

      This is a good idea. The only caution is the flip side of the writer's statement… Lower medium home values. Currently, home values have reverted in many areas to 2003 prices, leaving many under water. Further slides in medium prices, may create additional hardship. But, we have seen what happens when prices are artifically inflated.

    24. Paul M. Allen says:

      Re: Eliminating Freddie Mac and Fannie Mae. What would the effect be if these two agencie were restricted by federal law to an upper limit of mortgages financed, say the median price by federal region or $200,000? Both values to be adjusted by inflation/deflation annually.

    25. John says:

      Fannie/Freddie prospered for many years, until key Congressmen threatened their cheap U. S. funds, unless they started buying junk loans. Delinquencies then forced them to sell their junk to Wall Street, for global distribution. When this collapsed, credit froze, bailouts bloomed, and our long recession followed. The lesson is easy…. Never let career politicians buy low income votes with other peoples money. Unfortunately, this will stop only when term limits are universal. Congress will never do this, so the States will have to amend our Constitution, before we are bankrupt, and then lose our prosperity and freedom, under martial law..

    26. American patriot says:

      In the hands of the present administration everything which has been done has as its goal government growth with the end result being socialism. Mr Soros bankrolled Barack Obama with that as his goal. Hopefully there are enough Americans with a still functioning brain to send this minion of destruction back to his native home, where ever that may be.

    27. Jerry Scripture says:

      I am a home builder who has been in the business for over 40 years. I am a past president of the Home Builders Association of Virginia and have been very active in my industry.

      Government intervention in financing is a serious problem in our industry. The current system is plagued by government overreaction and intervention in the market for mortgage money. Terms and conditions and underwriting have gone from the ridiculous to the sublime and well qualified buyers are now hassled by minutia if they dare go near a fannie freddie product.

      As realtors and builders and even consumers we are brainwashed to believe the government products need to be rescued. What we need is to ditch the government intervention. Give the boot of Dodd Frank off the throat of the banking industry and let buyers, sellers and lenders do what they have aways done best. We delude ourselves to think inserting bureaucracy into the loan business will help anyone.

      Kudos to Heritage and Anaraki for this good work.

    28. John T Sewell says:

      Dear Sirs: Yes, I agree with all you have said. Both need to be Bankrupt and out of business and should have nave never been in it to begin with. The LESS the FED. GOV. is in anything the better off we as a society will be better off. Phase them out just as soon as you can. Respectfully, John T. Sewell

    29. CJM2 says:

      Unfortunately, no one is blaming the inflated pricing of the new/used homes that are on the market. It isn't just those who loan the money who are to blame for the housing crisis, but it is also the builders who are allowed to sell poorly constructed homes at bloated pricing idexes and people who think their $89,000 home is suddenly worth $350,000. This mentality has to cease. Furthermore, there is an over-stock of new homes that are sitting empty 4 years after they were built–it's rather foolish to see new subdivision construction across the road when the newer subdivisions are sitting empty because no one can afford those $450,000 price tags. Sure, go back to the days where only those in the upper income bracket can afford to buy a home, but make sure the rents go down in order to accomodate those who are left out of the new/used housing market. It's pretty unsettlling to be forced to pay $650/month for an apartment that one must share with cockroaches and other vermin–and is not really up to par with decent rentals.

    30. Manawai says:

      As a retired commercial banker, I believe the we need FHLMC/FNMA to be a buyer of qualified long term fixed-rate moretgages. Where these agencies when wrong was only in this century when they started buying higher risk non-qualifier asset-based loans. For whatever reason, they strayed from the well-established and sound practice of buying only loans where the borrowers' income was verified and qualifed by what used to be a 3.5:1 income to debt ratio. The reason we need these agencies to be back to (sound) basics is that most commercial banks will not tied up tie up tie up their money in a long term fixed-rate instruments when their source of funds, their depositors' money, re-prices at least annually. The danger being that a bank can end up paying as interest rates rise a higher rate for it's money source (deposits) than it's collecting in its long term mortgages. This situation was exemplied in the 70s in the REIT industry which borrowed money on short term lines of credit (rates floating on prime rate) and lending long into fixed-rate developement loans. It the old saying, "Those who cannot remember the past are condemned to repeat it." ~George Santayana, Reason in Common Sense, The Life of Reason, Vol.1.

    31. Whicket says:

      I say eliminate freddie and fannie, let prices stabilize and make the government release 10% public lands for sale every year

    32. Manawai says:

      We need the federal agencies to buy fixed-rate well-qualified loans because sound risk management and financial capacity prevents commercial banks from lending enough to keep up with the demand for mortgages in a rapidly expanding real estate market. FHLMC/FNMA who bought these qualified loans resold them in the investment markets to funds which invested in them much like they would with bonds. What went wrong was the investment managers' short term outlook which focused on quarterly returns (on which thieir bonuses were based) at the expense of long-term risk. This short-sightedness enticed them to over allocate funds in the higher risk – higher yielding non-qualifed mortgages and we all know what ultimately happened there.

      This bad situation was further exacerbated by the obvious logical fallacy in non-qualifier loans where the lender (ultimately you and me via our retirement investment accounts) relies on the sale of the collateral to pay off the debt owned on it; an exit which only works in a rising or flat market, but not in a declining market which, of course, always occurs after a sustaied period of inflation.

    33. Robert says:

      To a prospective homebuyer, as well as to a seller, it makes steel-trap logical sense to all those who believe in the capitalistic system to kick the Federal Government's posterior out of the process and let the system work as it will do given the opportunity to be left alone.

    34. Greg V says:

      Sirs: What you propose is letting the free market work. Obama and his cohorts in the democratic party have clearly and consistently said they have no interest in letting this happen. So, without regime change, don't waste your breath.

    35. Bill Scott says:

      I disagree with the conclusions reached by your author. Low down payments have allowed the "average" consumer the dream of home ownership. The success of the VA (zero down) and the FHA 3% down program has been an unqualified success. The explosion of home prices came with the loan programs that through out common sence in the underwriting process. If the buyer couldn't afford the house in the first place with verifiable income and employment then they should not have been approved for a loan.
      It is a fact of life that there will always be foreclosures. But I don't know of a single individual that bought a home that had the intentions of letting that home go into foreclosure. The human foible of instant gratification along with the loan programs encouraged by the likes of Barney Frank allowed the market to surge with unrealistic increases in price and expansion. Fannie and Freddie till have a place in the mortgage market but you must have common sence in the loan process.

    36. Mclenachen Sr. says:

      It would be a great blessing for our contry.

    37. Sue Davis says:

      We do not need Freddie Mac or Fannie Mae. We already had the Federal Land Bank (for farmers) and the FHA for persons of lower incomes (but with a job). When I first bought a house, you had to own the land or have 20% down, have a verified job, good credit rating, show the lender a copy of your recent tax return and a copy of your W-2 form. The lender kept the loan (and did not bundle it and sell it); thus, the lender wanted to make sure he made good loans. Freddie Mac and Fannie Mae built a hugh fancy building and paid the "big wigs" huge salaries — like most Government establishments. Less Government is better.

    38. Victor Barney says:

      Won't happen as long as America remains America.

    39. Jom Buzzell says:

      Fannie Mae, and Freddie Mac should be sold off, the sell off should contain no federal guarantees, and the agency that admisters the entities should be abolished. Our government should not be in the house or loan guarantee busines in any shape, fashion, or form; the same should be done with the housing finance programs under USDA rural lending, and subsidy programs. 1% interest on 70-80% LTV never made sense to me, plus a subordination to the other lender who takes 20-30% position on the rest of the financing, unbelievable. Who ever dreamed up that program, and sold it to congress, and the executive branch should join Bernie Madoff is his suite. And then there is the Reverse Mortgage Program, if that was such a good investment program the lenders would have offered those loans with no federal guarantees to induce them to participate in the program. Just food for thought as we try to get the federal government our of our lives.

    40. Guy Shannon says:

      If one believes in this picture of simplicity, one is surely lost. We must ask serious questons regarding this housing "bubble". Such questons must concentrate on how the dollaar is created (now a Federal Reserve Note). Another queston is how many dollars are put into circulation by the signing of a mortgage? Do these dollars go into the individual home purchaser's bank account, or are digits of no real value put there? If the lender forecloses, how much money does it really lose? If the FED is allowed to print money, then what allows this to happen? Is money a product of the FED from whcih, by its circulation the FED profits? Fannie Mae and Freddit Mack should be abruptly dissolved and done away with; and then onto a complete re-organization of the FED, but even more critical in all of this is very real cuts in government spending and the ceasing of non-constitutional and unnecessary departments and agencies.

    41. SueD says:

      Any mortgage company, bank or savings and loan accepting a credit application, without verification and a credit check, should not be submitted for loan approval. A 10% or 20% down payment may be acceptable, but a value exceeding the appraised market value should be questioned or refused. At one point, mortgages were provided with as much as 120% of the appraised value. Many states have approved appraisal boards which can be government and politically influenced. A so called "drive-by" appraisal provides no accurate information on the condition of the interior of the home. The Resolution Trust Company, of years ago, seemed to be as political, corrupt and biased. Fannie & Freddie may be corrupt and should go, but government, whether federal or state, requires honesty and integrity from the top down.

    42. Bill Frotenberry says:

      HOORAY ! An excellent project for our new congress to be elected in November.

    43. Tim Tieman says:

      Well written and I'm sorry to see there are no comments. Two other issues the writer could have considered is the rush back to over-leveraged loans and 203-K loans that have the same effect as over-leveraging. I'm a Realtor and the NAR has made every effort to keep Fannie and Freddie in the game. By doing so they keep their influence with the politicians but harm the countrty..

    44. Blair Franconia, NH says:

      We'd be better off.

    45. Judy says:

      I'd vote for just about anything that would get the Federal Government out of our lives.
      Great idea! Sell it to Romney! Get it into the Republican Platform.

    46. Fred Yates says:

      The US would be better if Fannie and Freddie were gone, as well as the Dodd-Frank Bill and the Federal Reserve.. Then reinstate the Glass–Steagall Act of 1933.

      But that is only the barest beginnings, much, much more must be done to recover our Nation.

    47. Rapparree says:

      Lenders of last resort – ha!. More like co-conspiritors (with the adminstration, Congress and lending banks) to arrange private profit while enjoying no risk by having Fannie & Freddie eat all the losses.

    48. Trip Jones says:

      Your work seems to focus on a very narrow aspect od the housing finance market to draw its conclusion…the supply of cheap credit. While I agree with your general conclusions, you utterly fail to address thr purpose of an institution like FNM a and how it was abused. You imply that they simply provided volumes of cheap credit and that credit driven demand created the bubble…in reality it was not nearly that simplistic.
      FNM was created to create liquidity within the banking system. Say a bank had $1 million in capital and proceeded to make $1 million worth of housing loans. What would the bank do the next day considering they had no more money to loan…which is a primary bank function? FNM was there to buy the loan and could do so profitably and consiveritively. FNM could borrow money more cheaply than the bank because of its credit relationship with the US Treasury. If it only borrowed the exact amount it needed to buy a good quality housing loan it would do so conservitively. It was never the actual institution of Fannie Mae that created the problem. As is usually the case, the problem was the poor policy known as affordable housing…created by liberals like Dodd and Frank. The institution itself is rarely the culprit…it is the people that run them and their short sighted ideals and cavalier attitude concerning thr long run implications that repeatidely get us into trouble.

    49. William C. Mullen says:

      The only question, which comes, to my mind, is this. How do we change the system, if the overwhelming majority, of our citizens, are not interested? The ugly truth is, that apathy reigns supreme. No one seems, to care, if the ignorance, of the minority, has placed them, in this position. "It is their problem, and what do I care, if fools lose their homes. They should have figured out they cannot afford a house, before they got involved." The average citizen does not read stories regarding this problem, and are so uninterested, in anything others do. I have yet, to find anyone who would sit down, and have, an extended conversation, concerning a problem, which does not concern themselves personally. We must find a way, to connect, with the majority, and hopefully they will get, off thier collective butts, and vote! I do not see this happening any time soon. The "frog" is swimmng, in increasingly hotter water, and I fear we will not realize the danger, until it is way too late.

    50. Wayne Peterkin says:

      Why are homes foreclosed on? Because people stop making their payments. Why do people stop making their mortgage payments? Well, if they lost their job, that can be a good reason. But if they did not lose their job, they have no excuse. If borrowers were dumb enough to borrow more than they could repay, they deserve to lose their home and have their credit rating hammered. If they financed with adjustable rate mortgages and saw their mortgage payments rise as a result, that's their fault also. They had a choice and made a bad one. The reality is that all of these issues are involved plus at least one more. Some people saw the value of their home decline to less than they owed, and instead of living up to the mortgage contract they signed and vowed to repay, they just walked away and left the mortgage company holding the bag. These people should not only have their credit rating destroyed, they should be criminally prosecuted. The biggest reason for the housing problem is government mandated lending policies that encouraged people to buy homes they could not really afford and had no equity in. Mortgages given with no money down and payments far greater than was reasonable given the individual's income level. Years ago, you had to have a 20% down payment to buy a home and the payment could not exceed 25 or 30% of your monthly disposable income. If you did not meet these requirements, you did not get a loan and did not buy the house. Those policies meant the buyer had an equity in the house right from the start, an equity they did not want to walk away from. Were that still the standard today, the housing problem would not have happened. Sadly, the government is still promoting those same lending policies that have failed us all. Politicians never seem to learn.

    51. Clarence De Barrows says:

      The concept of government subsidized loans to less than qualified buyers is not supported by the Constitution. End of report!

    52. Pjki says:

      Uh-oh, I'm sure the liberals will find this title racist? Why? You ask? I don't know, just that EVERYTHING is labeled racist to the liberals. I'm just trying to get a jump on them.

    53. Jeff Leith says:

      The FDIC has to go, too. All it does is transfer risk from irresponsible banks to taxpayers.

    54. ThomNJ says:

      "…but Anaraki finds that "higher interest rates will lead to lower median home prices, which in turn will increase the ability of low-income groups to purchase a house." Though I am not a fan of Fannie and Freddie (and believe Jamie Gorelick and a few others ought to be in jail); I believe Anaraki is wrong here. I spent a considerable time in real estate some years ago, and house affordabiltiy is certainly an issue. But what tends to happen, if the market is stable or rising at any reasonable pace, high interest rates depress the house prices and low interest rates help the prices to get bumped up – it all boils down to the MONTHLY PAYMENT. If incomes are not growing as fast as the market prices, low rates tend to give the impression that one can afford more house – but at the same time, when they are 3, 4 and 5% – the housing prices can get just a little more inflated than if the interest rates were at 10 or 12%, for example. The payment is stll somewhat "low", because the pain is spread out over time. Higher rates depress the price inflation, but the MONTHLY PAYMENT might be the same.

    55. ThomNJ says:

      I used to tell people to also place less emphasis on a house's assessed value. Different towns asess differently or at different times. Look at total taxes. We have towns that might assess a home at $100,000 with a tax rate of 1% while the next town assessed the same sort of house at $10,000 with a tax rate of 10%. There really is no difference – it is a seesaw with this as well as with interest rates versus housing prices.
      Anaraki is wrong – it is what the buyer can pay on a monthly basis whether the rate is high or low.

    56. Gavin Volaire says:

      Morning Bell: What if Fannie and Freddie Were Eliminated?

      Newt Gingrich would have one less revenue stream?

    57. Bobbie says:

      if fannie and freddie were eliminated, we'd all be under equal responsibility in owning a home. Get rid of both and government overreach causing nothing but consequences on the responsible.

    58. Jackson TX says:

      Our BofA refi loan somehow got sucked up by Fred and Fan – not at my request. I am not so concerned about our dreams of owning a home, which we have for over 40 years and even paid one off in CA. I fear our childrend and grandchildren will not have the same opportunities we did to own a home. The market is so fouled up who knows what will happen next, but we can be sure of one thing: handing it over to the inept Govt will not work.

    59. kjb199 says:

      The idea that interest rates and down payment requirements have little (if any) effect on housing prices does not seem correct. Now there is a possibility that the fact that I was selling real estate in the 1990s may have affected my judgement in this issue, but the results I have seen from that period have shown me a different conclusion than the researcher has drawn.

      Lower down payment requirements increase potential demand, since there are more potential buyers for a given property. The way the market corrects this is by raising prices to balance it out. And if interest rates are lower, there is more potential demand, since this lowers the monthly payment for a buyer. If the number of eligible and interested buyers increases, there are two results:

      1. Either the prices of houses increases to a new level (a potential bubble);
      2. Supply increases, in the form of extra sellers of already-built homes or new construction.

      Of the two results, they usually happen in the order given, since supply increases take slightly more time to occur.

      As for what would happen to current prices if the distortions of the mortgage manipulators were eliminated, I believe the net effect would be the bubble would be completely wrung out of the system and prices would revert to a new (lower) level. This may come as a shock to anyone who purchased a new home between 1995 and 2007, but for those who have lived in the same home for longer, it will be a nothing event.

      One other area that might be severely impacted would be property tax collections, which might be a future article.

    60. Jeffrey Denny says:

      The funny thing about many comments re: Fannie and Freddie is the inverse relationship between strength of knowledge and strength of opinion.

      If F/F are so useless, if eliminating them is so easy, then why hasn't your vaunted GOP offered any workable solution? Because they know eliminating F/F would cause the housing market to collapse, make it impossible for most Americans (and GOP voters) to finance a home, anger homebuilders, Realtors, mortgage lenders and many other big campaign contributors, and give banks no outlet to sell the loans they originate. F/F were created, and worked well, to keep a steady supply of funds flowing through the housing market. When banks are flush and housing is healthy, they don't need F/F. When they're not, they desperately need F/F — or they stop lending (or set impossible standards for approval). In fact, Wall Street is barely even now beginning to finance mortgages. F/F provide about 99% of the funds for lending. Without them, mortgage lending virtually would stop.

      The Heritage study looks at only one of the factors — interest rates. But look at the realities of the housing market now. F/F tightened their credit standards and raised their credit guaranty rate to lower their risk of loss. Mortgage lenders are pissed off because they can't originate as many loans. Homebuyers are frustrated because they need huge down payments and repeated requests for paperwork, and get turned down for minor blips. And so, home sales are struggling, which keeps home prices from recovering. Heritage doesn't focus much on the liquidity factor.

      Why are F/F in conservatorship and receiving bailouts? Because people stopped paying their mortgages, and home values — and thus, the mark-to-market value of loans — plummeted. Whatever you say about overpaid executives there, that's a drop in the bucket. A lot of these bad loans were forced on F/F by liberal policies (e.g., affordable housing goals), yes. But a lot simply reflect the bad economy and joblessness, which has caused even good borrowers to fall behind and default. What people also forget is that Wall Street's share of bad lending is about twice that of F/F, and in fact, during the run-up, when F/F wouldn't take these loans, lenders went around them and sold to Wall Street (leading to its bailout). F/F was late to the game, forced into it by lenders and shareholders that demanded they start buying and backing nontraditional loans, arguing that they were the "new normal" — a secular shift.

      Did F/F make mistakes? Of course. For one, they failed to predict the depth of the housing collapse, or that mortgage insurers — whose guarantee of the loans was supposed to help protect F/F — would fail, and thus fail to make good on their promise in spite of the billions in fees they took.

      My point is, so few of these comments have even a rudimentary understanding of how the housing finance system works, F/F's role, what actually happened, and what would happen if you took away a national source of reliable, lower-rate liquidity that must operate in all markets, at all times, under all conditions. Heritage doesn't help — either the debate, or serious attempts at policy solutions — when it takes just a small piece of the puzzle to back its predisposed position.

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