Could Fannie, Freddie be a Thing of the Past?

Winding down the two government-sponsored enterprises is the main takeaway from the Obama administration's plan for reforming the country's housing finance market.

Now that the Obama administration has presented its plan for reforming the country’s housing finance market, the industry is debating the report’s main takeaway: the winding down of government-sponsored enterprises Fannie Mae and Freddie Mac and putting limits on the federal government’s role in housing finance.

“The Administration will mobilize all tools available to address the nation’s broken system of mortgage servicing and foreclosure processing,” the report reads. “The government must help ensure that all Americans have access to quality housing that they can afford. That does not mean our goal is for all Americans to be homeowners.”

Does this mean that the American dream – the white picket fence and piece of property to call one’s own – is winding down as well? Fannie Mae and Freddie Mac were founded with the goal of expanding the secondary mortgage market, thus allowing more people to buy homes. In the late 1990s, Fannie Mae made a significant move toward the subprime market. By the time that the government-sponsored enterprises were placed into Federal Housing Finance Agency conservatorship in September 2008, Fannie Mae and Freddie Mac owned or guaranteed nearly 57 percent of the nation’s $12 trillion mortgage market.

“Fannie Mae and Freddie Mac held true to their original mission for many years,” the report asserts. “For decades, borrowers, lenders and investors benefited from the deep, liquid markets these institutions helped establish. … But in the years leading up to the recent financial crisis, trillions of dollars of financial decisions were made across the U.S. economy and around the world on the faulty expectation that national house prices would only rise. Twenty years of economic stability had desensitized every player in the housing market to the possibility that home prices could fall.”

Today Fannie Mae and Freddie Mac are under fire for allegedly contributing to major sub-prime mortgage losses, and the government is responding by stripping them of much of the power they once had. The proposals for doing this are being evaluated on four major criteria: access to mortgage credit, incentives for investment in the housing sector, taxpayer protection and financial and economic stability.

In other words, it’s going to take time. If indeed Fannie and Freddie are to be wound down, it’s likely not to be complete for the next decade – or more. In the meantime, homes will still be bought and financed, but what remains to be seen is if that number increases, decreases, or stays stable.