Investeens

Fannie and Freddie are facing a transformation…or are they?  A new Republican plan to change them isn’t much different from what they are now.  Currently, they buy mortgages from banks and then sell them to investors with a federally backed guarantee.  Let’s take a look at what the new bill will do.

The new bill created by House Republicans will set up five new private companies that will buy and resell prime mortgages to investors.  These mortgages will have a federally backed guarantee.  Sound familiar?  It’s essentially the same thing as what Fannie and Freddie did, and we know how that ended up.  Does replacing two companies with five changing anything? The government’s involvement in the housing market would not be reduced and it would most likely not fix the current situation in the housing market.

What's interesting is that for years, Fannie and Freddie only bought prime mortgages because they had a very small chance of going sour. Because the government guaranteed the money they borrowed to buy the mortgages, this meant less risk for lenders. So, Fannie and Freddie were able to pay less interest on the money they borrowed. It is, essentially, an unfair advantage. Not being able to compete head to head, Wall Street decided to buy and resell sub-prime mortgages. They did this so well, and generated so much in fees that this caught the attention of Fannie and Freddie. The two GSE's would eventually buy up and lot of subprime mortgages, leading to over $100 billion in losses, and financial aid from taxpayers. 

The Republicans have said they wanted Fannie and Freddie to go away and that the govermnment (and by extension, the taxpayers) should not be propping up their activities with guarantees. Now they seem to be proposing to shuffle the deck, but leave the same government guarantees in place!

Check out the article here.