Fannie Mae and Freddie Mac Update

In September 2008, Fannie Mae and Freddie Mac — two government-sponsored enterprises (GSEs) that facilitate residential lending in the U.S. — were financially rescued by the U.S. government and placed into conservatorship with the Federal Housing Finance Agency (FHFA).

This crisis swayed Congress to gradually reduce the role of Fannie and Freddie in the U.S. housing market. The House of Representatives’ Capital Markets and Government Sponsored Enterprises Subcommittee recently approved a series of bills toward this end.

The legislation seeks to hold Fannie and Freddie to the same standards as any other mortgage market participant with regard to risk retention rules. Cumulatively, the legislation will suspend the compensation packages for executives and place all other employees on a government pay scale; reduce the size of their loan portfolios; gradually increase the fee requirements; and end the companies’ mandates to back mortgages for lower-income people. These bills will now be sent to the House Financial Services Committee in the House of Representatives.

The Treasury Department has also issued a list of recommendations for Fannie and Freddie. These include three options:

  1. Limit tax payer exposure to risks in the mortgage market and relegate the government to more narrowly targeted loan programs, such as the FHA and VA.
  2. Develop a “backstop mechanism” to ensure homeowners had access to credit during a crises.
  3. Have a group of private companies provide guarantees on mortgage securities with the Treasury providing reinsurance on these securities.

Analysts believe comprehensive reform of the two GSEs will be years in the making. Treasury Secretary Tim Geithner said whatever plan Congress chooses, it would take between five and seven years to implement.

– From Prospect Mortgage Industry Insider

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