Page 14 - Boca Club News - October '19

Page 14, Boca Club News

Legal

Fannie Mae and Freddie Mac Reorganization

By Michael J Posner, Esq., a on their own savings accounts to fund the home loans. Any expansion of the loan market to (i) increase home ownership,
former Value Adjustment Board long-term lending meant tying up capital, precluding new, (ii) expand lending in areas that were previously avoided
Commissioner, a board-certified potentially more lucrative, new home loans and with defaults by lenders (known as redlining), and (iii) assist low to
real estate attorney and a partner as high as 25% in the 1930s, a substantial risk. moderate income parties to obtain a mortgage loan. This led
in Ward Damon, a mid-sized real Fannie Mae allowed banks to make long-term, fixed rate to loosening of credit standards to meet these homeownership
estate and business oriented law firm mortgages without the commensurate tying up of their capital goals. In addition, competition from private investment
with offices in Palm Beach County (or default risk) by buying the mortgage loans from banks. companies, who were also bundling more attractively priced
that handles purchase and refinance They created a secondary mortgage market wherein loans mortgage backed securities, led to a more aggressive, riskier
closing throughout South Florida. purchased by Fannie Mae would be sold as collateralized approach in lending approval by Fannie and Freddie.
They can be reached at (561) 594.1452, or at mjposner@ mortgage obligations, or later as mortgage-backed securities This led to the subprime mortgage crisis in the mid to
warddamon.com. (MBS) to investors. This freed up the banks to make new late 2000s with substantial defaults and failures of private
President Trump has just announced plans to seek loans and receive a fee for each loan originated and sold to investment firms and banks. As of 2008, Fannie and Freddie
substantial reorganization of the Federal National Mortgage Fannie Mae. In addition, the loans sold by Fannie Mae were owned one-half of the estimated 12 trillion-dollar mortgage
Association (FNMA), known commonly as Fannie Mae, guaranteed by the full faith and credit of the United States, market, and a true public collapse would have substantially
and the Federal Home Loan Mortgage Corporation, known making the loans less risky even if the underlying borrower damaged an already weak home loan market. Instead, and
commonly as Freddie Mac, the two main government stopped payment and the mortgage was foreclosed. as a result of mounting losses at Fannie and Freddie, the
sponsored entities that provide the funds for nearly half of In 1954, Fannie Mae was reorganized into a mixed federal government placed both entities into conservatorship
the residential mortgage loans in the United States. ownership corporation, selling off common shares to the (essentially bankruptcy) to stabilize the housing market.
Fannie Mae was formed in 1938 during the Roosevelt public while the federal government retained control through After investing hundreds of billions of dollars into Freddie
Administration as a government agency to expand mortgage its ownership of Fannie Mae preferred shares. Further changes and Fannie, the institutions stabilized, and eventually became
lending so as to encourage homeownership and home occurred in 1968 when Fannie Mae was converted into a fully profitable, paying back the monies invested. In fact, they have
building. Prior to its creation, most mortgage loans were short private corporation, splitting the entity into Fannie Mae and now repaid the full amount invested and a profit of nearly
term with a balloon feature, as banks were mostly dependent the Government National Mortgage Association (commonly 110 billion dollars to the federal coffers.
known as Ginnie Mae, which remained a government Given this state of affairs, and the deregulatory mindset
organization, and which insures certain mortgages such as of the President, it is no surprise that he would propose
loans by the Veteran’s Administration). modifying or even ending conservatorship. The stated goal
Advertise, To increase competition in the secondary mortgage is to create a limited role for the federal government in the
market (which Fannie Mae had controlled for thirty years), housing finance system, enhance taxpayer protections and
in the Paper! the government created a new government-sponsored entity, increase the role of private sector competition. This would be
Freddie Mac. Freddie Mac was also a public company, and done by reducing the dividend paid to the federal government,
Check out our Web site! also bought mortgage loans for sale on the secondary market. allowing Fannie and Freddie to increase its capital reserve
The 1970s saw the steady rise of mortgage-backed
(now at only three billion dollars), a limited public offering

securities as the main vehicle of bundling of large blocks of and the long-term goal of total privatization.
www.seabreezepublications.com mortgage loans. The attractiveness of these MBS was due, Given a divided Congress and the bad taste of 2008’s
in part, to the implied belief that the MBS was guaranteed housing crisis, it appears that any material changes may take
or call 746-3244 by the United States, even though the entities were no longer years to settle. In the meantime, low interest rates and high
owned by the government. profits continue to benefit the federal government by holding
The 1990s and early 2000s saw the push towards onto Fannie and Freddie.

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