The American administration has been speculating over the future of two famous government-backed mortgage lenders, Fannie Mae and Freddie Mac since 2011. Though the pace at which decisions about the two entities are being made is slow, the government is diligently working on various proposals to determine a new future for the now-profitable lending giants.
One potential proposal, which has the most favorable votes in the senate, is the Corker-Warner proposal suggested by Republican senator, Bob Corker and Democrat politician, Mark. R. Warner. The bill suggests eliminating the two firms and merging them into a single large entity. The new entity will allow the private sector to acquire loans and securitize them by a government guarantee called The Federal Mortgage Insurance Corp (FMIC). However, the private investors will have to bear10 percent of the initial losses, if any, reports The New York Times.
But this proposal has its downsides as well. Experts believe that the scheme is more like an insurance fund. They do not have much faith in its operation. They assert that when a next housing bubble arrives, the FMIC will probably have insufficient funds to buoy the market because these funds will already be used up for political benefits or be locked away calling it a "tax fund".
"When the catastrophe actually occurs, the mortgage insurance fund-like the bank insurance fund-will be found to be inadequate and the taxpayers will once again be called upon to fill in the hole. Exactly this just occurred when Congress had to pony up $9.7 billion to support the federal flood insurance program after Hurricane Sandy," Peter Wallison at Investorhub writes in his blog. Wallison also claims that this proposal ignores the interests of homeowners and focuses more on compensating investors.
Another potential option being discussed is downsizing. This proposal is being worked on by Democrat senator, Jack Reed who suggests restructuring Fannie and Freddie and stripping the entities of all its investment portfolios only to provide government backed securities.
According to the Wall Street Journal, both the proposals are still in their development stage and will face a lot of opposition from the Republicans when completed. Apparently, the group believes that "government involvement" in the mortgage market has been the root cause of the housing crisis.
Throughout the years, Fannie and Freddie have provided easier access to loans for middle class homeowners. Will the elimination affect the economy and the market adversely? Not so much, apparently. According to a feature at TheFoundry.com:
"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."
Once the two firms are eliminated, interest rates may go up initially but those rates will lead to lower median home prices and boost home-affordability among low-income home buyers.
Fannie and Freddie were bailed out by the government when the housing market crashed in 2007. The companies received an aid of around $170 billion then. More recently Fannie Mae announced that it would pay back around $59.4 billion to the U.S. treasury. It now owes $21 billion more, which it hopes to pay back considering the improving real estate scenario of the country.
Meanwhile, Fannie and Freddie's days are numbered. Any proposal approved will get to enjoy the perks of a steadily growing property market. However, only time will test the chosen proposal's authenticity, especially when the bubble inflates and is ready to burst again.
