April 2, 2017 Carol Bernardes

What does the future hold for Fannie and Freddie?

Fannie and Freddie

It’s no secret that the economy has fought a difficult uphill battle since the financial crisis in 2008 that caused the second worst recession in American history. Heavily tied to that downturn, the housing market has also slowly been digging its way out of the economic rubble.

Representative of the difficulties caused by unsound financial and real estate investment practices of the past, formerly privatized housing lending enterprises Fannie Mae and Freddie Mac might just now have the slightest hope of seeing the light at the end of the tunnel under the new Trump administration.

Although both entities are funded by private investors and their stocks are traded publicly, they are, for all intents and purposes, a government asset. Because the government utilized nearly $188 billion taxpayer dollars to rescue them in 2008, both organizations became something akin to wards of the state, when the feds took control of roughly 79% of both companies’ ownership.

At the time, the bailout picked up the tab for hundreds of billions of dollars’ worth of mortgage-backed securities but also forced the government (and therefore taxpayers) to assume risks associated with providing the backing for low-cost, fixed rate mortgages. Meaning, if another economic downturn occurs, it will be the government that will need to be bailed out.

The bailout also instituted a law that required both Fannie and Freddie to begin contributing to the HUD’s National Housing Trust Fund (NHTF), which endeavors to create permanently affordable housing solutions for low-income families by rehabilitating already existing public housing. While indeed a noble initiative, there are still many hurdles to overcome in implementing any practical measures that would utilize NHTF funds. The biggest being that at only $174 million (as of 2016) to be distributed across 50 states, the fund itself is less than a drop in the bucket compared to the massive level of housing needs for low-income families across the country.

President Trump’s nominee for the role of Treasury Secretary, Steven Mnuchin, has publicly stated his position of placing a high focus on government-sponsored enterprise (GSE) and housing finance reform – which means that Fannie and Freddie have at least a snowball’s chance of being released from their government subjugation.

By freeing Fannie Mae and Freddie Mac from the government’s stranglehold, both agencies could begin to retain their profits once again, which would allow them to build a financial cushion for use as a life preserver should another financial crisis occur.

Also in doing so, further housing reform, an issue that has been argued for by both sides of the partisan divide, will become an immediate priority as Fannie and Freddie have provided the majority of the NHTF’s funding to date. Maybe more importantly, though, is that the government, and therefore taxpayers, will be mostly off the hook for any future economic fallout.

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