Homes For Sale

Bipartisan legislation that would replace Fannie Mae and Freddie Mac with a single government-run secondary mortgage lender has been introduced in the U.S. House of Representatives.

The bill – H.R. 2413, the Secondary Mortgages Facility Act of 2011 – would create an agency that would take over Fannie and Freddie’s role of guaranteeing certain types of mortgages in order to promote affordable home loans and facilitate home ownership for middle class Americans. It’s co-sponsored by Rep. Gary Miller (R-Calif.) and Rep. Carolyn McCarthy (D-N.Y.).   It’s been a foregone conclusion that Fannie and Freddie, which the Congressional Budget Office estimates will likely end up costing taxpayers over $300 billion in bailouts after suffering huge losses in the collapse of the subprime mortgage market, are headed for extinction. The companies have few friends in Congress and even President Obama has said he favors winding them down.   However, the question has been what will take their place. The new would essentially reinvent them as a single government agency. Ironically, that’s what both Fannie and Freddie were created as, before they were both privatized in the name of free-market efficiency (and fell back into the government’s hands when they were placed into receivership in 2008).   As proposed, the new agency would operate under some much stricter rules than Fannie and Freddie do. For one, they would be prohibited from buying mortgages that exceed 80 percent of the purchase value of the home, unless the original lender maintained at least a 10 percent share itself. For another, the Federal Housing Finance Agency, which currently oversees Fannie and Freddie and would have jurisdiction over the new agency, would be directed to ensure that the new facility did not exceed about half of the U.S. mortgage market.   The new agency would also be limited to holding a maximum of $250 billion in mortgages at any given time, meaning it would be largely limited to buying mortgages and repackaging them as guaranteed mortgage securities for sale to investors.   That’s basically been the job of Fannie Mae and Freddie Mac stretching back to the Great Depression – make mortgage lending more attractive for investors by guaranteeing the loans, thereby bringing more money into the mortgage market, keeping rates low and making it easier for middle-class families to qualify for a mortgage.   Conservative critics have long blasted Fannie Mae and Freddie Mac for distorting the housing market through an implied government guarantee while leaving taxpayers holding the risk, attacks that greatly intensified following the crash of the subprime mortgage market, which effectively ruined both lenders before the government stepped back in.   However, strong support remains in Congress and much of the housing industry for a new entity to carry out Fannie and Freddie’s traditional role, though under stricter guidelines. Backers of such an agency are concerned that without some sort of government backing, mortgages will become unaffordable for a broad swath of American society accustomed to home ownership, further delaying the recovery of the housing market and economy.

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