Fannie Mae was founded in 1938 as part of ground breaking New Deal legislation and was created to act as a stop gap in the event that a catastrophic economic downturn occurred and froze credit markets (that was some great forward thinking FDR!). Thirty years later, in 1968, congress converted Fannie Mae into a public/private partnership which took the funding of the enterprise off of the government books and outsourced it to private investors who governed the institution via a board of directors.
Fannie Mae functions by guaranteeing loans. What happens is a banking institution makes a loan, and then if the loan meets certain standards (it's not sub-prime, ability to pay is documented, credit risk is acceptable, minimum down-payment is met, etc) it can sell the loan to Fannie Mae. Fannie Mae buys the loan and converts the loan into a security (basically a big pool of mortgages). The securities are auctioned off on the open market and bought by pension funds and other investors.
In 1970 Freddie Mac was created to compete with Fannie Mae so that one institution didn't have complete control of the mortgage market. Together, Fannie and Freddie are the GSE's (Government Sponsored Entities) and ensure stability in the housing market.
As covered in a previous post, there has been a concerted effort by Wall Street over the last 6 years to kill the GSE's.
So who profits from the death of the GSE's?
First, it might be helpful to examine who is advocating for their continued existence:
The Community Mortgage Lenders of America (behind a paywall)
December 10, 2014
The Honorable Jacob Lew
Secretary of the Treasury
1500 Pennsylvania Ave. NW
Washington, DC 20220
The Honorable Melvin L. Watt
Director, Federal Housing Finance Agency
400 7th Street, S.W., Ninth Floor
Washington, D.C. 20024
Dear Secretary Lew and Director Watt:
The Community Mortgage Lenders of America (CMLA) request that you immediately
open negotiations to restructure the payment terms embedded in the Preferred
Stock Purchase Agreements (PSPAs) between the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation (collectively the
“GSEs”) and the U.S. Department of the Treasury (“Treasury”). This would enable
the GSEs to retain more of their net earnings and re-build their capital positions.
As you are aware, the GSEs are currently mandated to remit 100 percent of their
profits under the current terms of the PSPAs, which precludes building capital. To
date, Treasury has been more than repaid the $190 billion in advances. The GSEs
have paid the Treasury a total of $220 billion and must continue to remit all profits.
The current GSE repayment terms create the undesirable combination of record
high guaranty fees and unsafe low levels of GSE capital. These high fees are
effectively pricing otherwise credit worthy borrowers out of the market. That is in
direct contradiction of the original GSE mission – to boost homeownership by
creating greater liquidity in the secondary market.
So, credit unions and local banks want the GSE's to stay around.
The Civil and Human Rights Coalition, comprised of over 200 hundred civil and human rights groups
WASHINGTON -- Wade Henderson, president and CEO of The Leadership Conference on Civil and Human Rights, issued the following statement regarding its letter submitted to the Federal Housing Finance Agency emphasizing the critical role of Fannie Mae and Freddie Mac in realizing the dream of homeownership in communities of color:
“The Great Recession turned the American dream into a nightmare for hundreds of thousands of hardworking families, including in African-American and Latino communities. Almost six years later, a significant number of these families are still recovering and fighting to regain their financial security. For many, homeownership remains the primary indicator of that security and serves as a pathway to building our nation’s middle class.
To continue strengthening our housing market and ensuring shared prosperity, we must look to the future of Fannie Mae and Freddie Mac. Without strong leadership by Fannie and Freddie, many will be unable to access affordable 30-year fixed-rate mortgages. Our comments today speak to these central goals, and they recommend that any changes to the oversight and regulation of these agencies consider the unwinding of the conservatorship – which would allow the agencies to rebuild their capital and increase their lending capability.”
Civil rights groups want the GSE's to stay around.
Hell, even the guy who advised congress on writing the legislation that seized the GSE's into conservatorship points out the unlawful nature of the current events:
The perpetual conservatorships and Treasury sweeps are a violation of every principle of insolvency law. I do not make this statement lightly. After more than twenty years at the Federal Deposit Insurance Corp., and frequent participation in domestic and international efforts to improve insolvency laws, I provided technical advice to Congress on HERA.
The FHFA is ignoring the basic duty of a trustee: to protect the interests of all creditors. By keeping the companies in conservatorships and diverting their cash to Treasury, the FHFA effectively prefers one creditor over all others. While Treasury provided critical up-front funding to the GSEs, it has now been well-compensated under the original agreements. It cannot simply strip the companies of cash in perpetuity.
Every sound insolvency process, including HERA and the FDIA, repays the funding provided but then pays all creditors the remaining value. In bank resolutions, once the FDIC's cash outlay is repaid, the FDIC receives no more money. The continuation of the sweeps through the conservatorships is a violation of every principle established in bankruptcy and in the more than 80 years of FDIC bank resolutions. And it has no support in HERA.
Numerous politicians, including
Sen. Charles Schumer (D-NY) have acknowledged that the GSE's have paid back far more then they were ever forced to unnecessarily borrow
The NHTF was established in July 2008 as part of the Housing and Economic Recovery Act of 2008 (HERA). This law required that Fannie Mae and Freddie Mac pay 4.2 basis points of their annual volume of business to the two funds. The requirement that Fannie Mae and Freddie Mac contribute to the two funds was suspended when the companies were taken into conservatorship in September 2008 during the financial crisis. Fannie Mae and Freddie Mac have since fully repaid the taxpayers.
So, who wants to kills the GSE's, and why?
There are lots of theories. As I noted in the primer, many of the TBTF banks want the cheap mortgage rates enabled by the GSE's to go away in favor of the far more profitable but volatile PMBS (private backed mortgage security, as opposed to the less lucrative and far more stable GSE ensured MBS security). I'm sure this is a big one, but there are other players as well. As many people are undoubtedly aware, far fewer Americans are able to access the housing market, and as a function of this rents across the county have gone sky high. Who is collecting that rent? Wouldn't you know, it's WallStreet!
Toward the end of 2012, Mark Alston, a real estate broker in Los Angeles, began noticing something strange. Home prices were starting to rise, and fast—about 20 percent annually. Normally, higher home prices would signal increased demand from homebuyers and indicate that the economy was rebounding. But the home ownership rate was still dropping. Somehow, the real estate market was out of whack.
Then there were the buyers themselves. "I went two years without selling to a black family, and that wasn't for lack of trying," recalls Alston, whose business is concentrated in inner-city neighborhoods where the majority of residents are African American and Latino. Now all his buyers were businessmen in suits. And weirder yet, they were all paying in cash.
Blackstone's deep pockets—$248 billion in assets under management and a $3.6 billion credit line arranged by Deutsche Bank for buying houses—allow it to outbid individual buyers, driving up local real estate prices and pushing families out of the market. "You can't compete with a company that's betting on speculative future value when they're playing with cash," says Alston. "Institutional investors are siphoning the wealth and the ability for wealth accumulation out of underserved communities," adds Henry Wade, cofounder of the Arizona Association of Real Estate Brokers.
CaDonna Porter moved into an Invitation Homes property outside Atlanta with her children in September. When part of her monthly payment was rejected because she tried to use a debit card, the company demanded that she deliver the remaining amount in person, via certified funds, by 5 p.m. the following day or incur a $200 fee and face eviction. Porter took time off from work to deliver a money order in person, only to be informed that the payment had been rejected because it didn't include the late fee and an additional $75 insufficient funds fee.
In a maddening string of emails, Invitation Homes repeatedly reminded Porter that it could file to evict her unless she paid the penalties. When she finally said that she would seek legal counsel, Invitation Homes agreed to accept her payment as "a one-time courtesy." Andrew Gallina, Invitation Homes' vice president for marketing, says it treats all of its renters equally: "Under the law, we're not allowed to make changes or exceptions. That's just basic fair housing."
It seems outrageous that as a nation we would stifle the upward mobility of an
entire generation (the building of home equity via home purchase vs. capital expense of renting is widely considered to be the first rung on the economic ladder, as it allows monthly regimented savings in the form of home equity and creates an asset that can be leveraged by the owner to finance additional upward mobility such as opening a business or accessing higher education).
It's not all their fault. Millennials want to buy homes -- 90% prefer owning over renting, according to a recent survey from Fannie Mae.
But student loan debt, tight lending standards and stiff competition have made it next to impossible for many of these younger Americans to make the leap.
"When we surveyed Millennials they cited several barriers to homeownership, especially access to financing," said Steve Deggendorf, a senior director for Fannie Mae.
Many Millennials simply can't come up with the hefty 20% down payments. Others don't have good enough credit to qualify for loans.
To the
ire of WallStreet, Fannie Mae recently announced that at the beginning of 2015 they would begin accepting 3% down payments from qualified buyers, a move aimed at giving millenials with jobs a shot at owning their own home and getting out of the rental racket.
The blowback shows the pressure Watt faces in his effort to expand homeownership six years after defaults on subprime loans set off the financial crisis. Watt said low down-payment loans are a safe way to help families with healthy incomes and meager savings buy homes. Jeb Hensarling, chairman of the House Financial Services Committee, said Watt’s plan is a return to the policies that caused the housing crash.
Watt’s proposal is “an invitation by government for industry to return to slipshod and dangerous practices that caused the mortgage meltdown in the first place and wrecked our economy,” Hensarling said in a statement last week. The initiative “must be rejected.”
Keep in mind, subprime loans were primarily the dominion of non-GSE PMBS, the same loans the GSE's were forced by then Treasury secretary Paulson to purchase at face value after he took the GSE's over in 2008. When Paulson took the GSE's over to bail out the TBTF banks, 98% of the GSE's backed mortgages were being paid on time and both of the GSE's had net positive worth at the date of their unrequested take-over. The subprime mortgage contagion that rocked the global economy in 2008 was begun and sustained as a function of TBTF bank PBMS that the GSE's elected not to ensure at the time of mortgage origination. It's far more profitable to Wall Street to keep the vast majority of Americans renting at sky high rates and to charge the few who can afford a mortgage an extra 100 or so basis points with a greatly expanded array of fees.
So, that's who is trying to kill Fannie, and is it really that hard to imagine? We already have an incredibly lucrative for-profit prison industry that sees it's owners write laws via ALEC that result in more Americans being locked up for longer times than ever before simply too power a for-profit engine of misery, as noted on the front page
Anything to make a buck.