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Fannie & Freddie Are Bound by New Rules

Fannie & Freddie - New Rules
The government exercises its conservatorship over the two GSEs.

There’s a tighter reign on Fannie Mae and Freddie Mac that will be pulled by the government starting next week. In a report by Tami Luhby of CNNMoney.com, the two government sponsored enterprises (GSEs) will be subject to the Federal Housing Finance Agency’s requirement of guaranteeing each company’s portfolios with capital. That’s aside from ensuring their responsibility of securitizing mortgages. The report also includes some opposition from analysts regarding this plan, “Analysts, however, say it’s more important to determine the future of Fannie and Freddie, which were taken over by the federal government in September, than to issue portfolio regulations.”

We see no reason why the GSEs shouldn’t back up their securities with sufficient capital. In fact, they should have done this a few years back before they mounted losses from securitization. The two firms had a terrible third quarter result last year when each firm incurred massive deficits. Freddie Mac posted a $25 billion loss while Fannie Mae had a more disappointing shortfall of $29 billion. After engaging in dangerous subprime and Alt-A loans without full disclosure of every borrower’s income, they bundled the mortgages and packaged them into securities that seemed very attractive to investors then. However, when the property bust began, these securities suddenly became worthless

If the point of the critics who are concerned about the GSEs’ future is to restore Fannie and Freddie’s financial position, isn’t it sensible to begin by rebuilding public trust through the FHFA’s regulation? If they are worried about fewer loans available to borrowers once a large percentage of the GSE’s funding will now be redirected to backing up securities, then the two firms must tap into the Treasury backstop that was released last year. It may get the ire of the taxpayers but the money’s intention is primarily to protect the collapse of these firms currently managing $5 trillion of home loans. It’s an obligation of the government not only to save Fannie Mae and Freddie Mac but to salvage the entire mortgage industry as well.

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