Uncertain Future For Fannie And Freddie

Jul 17, 2013
Originally published on July 17, 2013 4:05 pm

For the first time since the big housing crash five years ago, it appears that some lawmakers are getting serious about replacing the mortgage giants Fannie Mae and Freddie Mac.

Fannie and Freddie back most of the mortgages in the country. Now, two prominent senators — one a Democrat and one a Republican — have a proposal to phase them out.

NPR’s Chris Arnold explains what this could mean for the future of the housing finance system.


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From NPR and WBUR Boston, I'm Jeremy Hobson. It's HERE AND NOW.

For the first time since the housing crash, it appears that some lawmakers are starting to get serious about replacing the mortgage giants Fannie Mae and Freddie Mac. Fannie and Freddie back most of the mortgages in this country. And there's a new proposal from two senators, one Democrat and one Republican, to phase them out. For details, let's bring in NPR economics correspondent Chris Arnold. And Chris, first, just remind us exactly what Fannie and Freddie are and why they are so important to the economy?

CHRIS ARNOLD, BYLINE: Hey, Jeremy. Sure, yeah. And anytime we talk about mortgage finance, it's pretty easy for people to go cross-eyed pretty quick. But this is a very, very big deal. Fannie Mae was created during the Great Depression, back in 1938. And the government set it up to ensure that people had access to safe, long-term, affordable mortgages. Freddie Mac came along a bit later. And the two have become sort of the pump houses for money in the mortgage market. And they're big part of homeownership, and so they're big part of what we think of as the American dream. And now the government's talking about getting rid of Fannie Mae and Freddie Mac. And so anybody who owns a house, anybody who someday might want to own a house, they will all be directly affected by the changes that get made here.

HOBSON: If changes get made here. And there are a lot of people, by the way, who think that these two behemoths made a lot of mistakes and that led to their federal bailout.

ARNOLD: Absolutely. You know, even Fannie and Freddie admit that they made mistakes, and they made mistakes to the tune of $190 billion.


ARNOLD: That's the amount that the government had to bail them out. And basically that happened because they got caught up in this whole betting on the housing bubble craziness that brought down a lot of financial firms here.

HOBSON: Financial (unintelligible) as well.

ARNOLD: So a lot of - but they were supposed to be not doing that. They're, you know, stalwarts, quasi-governmental entities. So a lot of people in Congress got very upset and they want to dismantle them in large part because of that.

HOBSON: So let's talk about this proposal. This comes from Republican Senator Bob Corker and Democrat Mark Warner. They want to replace Fannie and Freddie with something else.

ARNOLD: Right. And what they want to replace Fannie and Freddie with is more of a private sector-based system. And so all of the moving the money around, bundling mortgages, selling them off to investors around the world, that would all be done - instead of by Fannie and Freddie, that it'd all be done by private firms. Now, the problem is the government guaranty that Fannie and Freddie - Frannie and...

HOBSON: It's hard to say.

ARNOLD: Yeah. Back to back. We call them GSEs sometimes; it makes it easier.


ARNOLD: So anyway, this government guaranty is very important. It's kept the mortgage market alive because it keeps people investing in mortgages because they're guaranteed.

So the new system, these legislators were saying, has to have something like that. They're modeling the new guarantee after the FDIC program, which, you know, if you put $100 into a savings account and the bank goes bust, you get your money back because there's insurance money paid into the FDIC. Something along those lines would be created. The takeaway is it would be private money, not taxpayer money that would take the first loss.

HOBSON: But there would still be some sort of a guaranty. What are people saying about this?

ARNOLD: Well, on the one hand, the proponents of this latest legislation, they say this is great. I mean, look, as you said, 90 percent of new mortgages are being backed by the government at this point. That's kind of crazy. Nobody thinks that should continue. The critics say, look, this would be a giveaway to the big banks, that, you know, we talk about too big to fail. And smaller and community banks worry that just the way the market works, this would make the biggest banks in the country even more powerful when it comes to home mortgages. And so they say, look, you got to sort that out, or you're going to create more problems.

HOBSON: NPR economics correspondent Chris Arnold on one effort in Congress to phase out Fannie Mae and Freddie Mac. Chris, thank you so much for joining us.

Thanks a lot, Jeremy. Transcript provided by NPR, Copyright NPR.