YOU MAY RECOGNIZE their names — and you might even know they are as crucial to the American housing market as hammers and nails. But few truly appreciate the financial liability mortgage companies Fannie Mae and Freddie Mac have handed taxpayers.
Congress and the White House don’t really want you to pull back the curtains of these two government-sponsored companies that own or guarantee more than half of America’s $11 trillion mortgage market.
Overhauling the way our mortgage market operates is clearly not an option, which is why Fannie and Freddie are not part of the comprehensive financial reform about to be passed in Congress.
How could the biggest losers from the Great Recession escape the regulatory claws of Congress? It’s hard to correct your own mistakes.
The near collapse of Fannie and Freddie in the fall of 2008 was not a Wall Street game that blew up on $2,000 Armani suits that Uncle Sam has to clean. It was the culmination of a financial Frankenstein created by Congress to give just about anybody the chance to live the American dream of homeownership.
The two companies currently are in conservatorship and on life-support systems taxpayers have fed to the tune of $145 billion and counting.
Where the losses will end no one knows, which is why the Treasury Department has given them a blank check to right their ships. The taxpayer tab could easily reach $500 billion, but you
don’t hear our lawmakers squawking about the debacle they created.
On the surface, both the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corp. (Freddie Mac) should be declared dead. The two lost $93.6 billion in 2009 and another $18.2 billion in the first quarter this year.
The mortgage companies created to provide liquidity in a secondary mortgage market incubated the contagion at the heart of our economic problems: They bought toxic loans from lenders, stuffed them into mortgage-backed securities, and sold them to investors worldwide.
But the problem started with our own lawmakers. The push from Congress in the 1990s to expand American homeownership further down the economic ladder forced the mortgage companies to start buying lower grade mortgages that carried higher risk. That set the stage for the Great Recession.
Fannie and Freddie still operate by the same rules they did when they were building the stage for the housing collapse, which sent other economic dominoes tumbling.
Congress purposefully kept Fannie and Freddie out of any financial reform, because to undo the two would undo our entire mortgage market.
If banks cannot originate a loan and sell it Fannie and Freddie, they simply will not lend, which is why small business is having just a difficult time securing loans. There is no secondary market to sell small business loans. The risk stays with the lender, something the mortgage industry rejects.
If lending in the housing market freezes over, our economy could sink into a death spiral.
To prevent that, Congress continues to enable Fannie and Freddie with taxpayer-funded bailouts in hopes their business models will fix themselves.
Drew Voros is the business editor. Contact him at avoros@bayareanewsgroup.com. Follow him at Twitter.com/bizeditor.
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