Background: The Federal National Mortgage Association, known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, known as Freddie Mac, are government-sponsored enterprises (GSEs) that became dominant factors in housing finance during the 1990s. Their stated goal is to “increase housing affordability” by purchasing mortgages from lending institutions which can then be bought by investors on the secondary market. These lending institutions are then freed up to offer additional loans for the purpose of buying yet more houses.
The Collapse of the Housing Market: Because Fannie Mae and Freddie Mac enjoy the backing of the federal government and are able to borrow more cheaply than private financial institutions, they were able to undercut private financial institutions leading up to the Great Recession. From 1990 to 2003, Fannie and Freddie went from holding 5 percent of the nation’s mortgages to over 20 percent.
Fannie and Freddie’s increased involvement in the housing market ultimately undermined its stability. Fannie and Freddie enabled a significant number of people to buy houses which they could not afford and had very little to no equity in. This fueled a housing bubble that was bound to collapse. By 2008, Fannie and Freddie held an astonishing amount of debt of nearly $8 trillion. Once homeowners started defaulting on their monthly payments at above average rates, it became clear Fannie and Freddie would collapse. Many low-income and first time home buyers lost their homes and Fannie and Freddie were eventually bailed out by U.S. taxpayers to the tune of $200 billion. Total economic loss to the country is estimated to surpass $22 trillion – $13 trillion in lost economic output and $9.1 trillion in home equity.
Homeownership: Many political leaders and organizations continue to support GSEs in the name of expanding homeownership so everyone can achieve the American dream, but despite receiving billions of dollars in taxpayer subsidies, Fannie Mae and Freddie Mac have failed to increase the U.S. homeownership rate. From 1968 to 2013, the U.S. homeownership rate has increased by only 1 percent, moving from 63.9% to 65%. Instead of enabling more people to achieve the American dream, GSEs have turned the American dream of owning a home into owning a mortgage.
The 30-year Fixed Rate Mortgages: Other advocates of GSEs believe that without them, the availability of the popular 30-year fixed rate mortgage (FRM) will go away. This is also not true. Fannie Mae and Freddie Mac helped standardized long-term fixed-rate mortgages but they did not invent them. In fact, the 30-year fixed-rate mortgage predates the secondary mortgage market in the U.S. by at least 20 years. Even now, 30-year FRMs exist in parts of the market where there is no government backing. Repealing GSEs would actually expand the availability and diversity of mortgages, giving consumers more choice when deciding to buy a house. Historically, 15 and 20 year FRMs and even many adjustable-rate mortgages (ARMs) have served the interest of consumers as well. These mortgages actually save money over the long term and have lower interest rates. This could be particularly attractive to many home buyers in light of the fact that U.S. citizens pay among the highest interest rates in the industrialized world mainly because of the prevalence of subsidized 30-year FRMs.
Solution: Despite the bailout and subsequent legislative reforms, the federal government’s involvement in the housing market through GSEs continue to undermine its stability in much the same way as they did before the Great Recession. Congress must act to remove GSEs from the housing market altogether. Doing so would allow private institutions to return to the secondary mortgage market and expand the capital available for mortgage lending through healthy competition. Removing government interventions in the housing market will ensure long term housing growth and stability.