Significant Changes to Fannie Mae and Freddie Mac in Motion

By Daniel Duffield

New changes to the government sponsored enterprises (GSE) could mean the end of Fannie Mae and Freddie Mac, as the two organizations intend to cancel current securitization procedures. When the dust settles, the new company could potentially be privatized or may be absorbed into the government.

Fannie Mae and Freddie Mac will soon combine in a joint venture in the process of home loan securitization that will essentially constitute a replacement of the two GSEs as we they presently exist, said their regulator on Monday.

According to a statement to the National Association for Business Economics from Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA), the goal of this exchange will be to establish a company of value that would be either sold or utilized as the foundation for the next evolution of the mortgage market.

These two GSEs, which currently aid in the financing of approximately two-thirds of new U.S. home mortgages, were commandeered by the government in 2008 during the mortgage crisis. Since that time, Fannie Mae and Freddie Mac have required roughly $190 billion from the U.S. Treasury in order to stay in operation.

DeMarco indicated that the aim of the upcoming changes would be to construct a unified infrastructure that would assist the mortgage credit industry and that would have the potential for privatization, government assumption, or independent function for utility value. To achieve these goals, these two separate entities would need to relinquish their individual systems.

Prior to his speech, DeMarco informed reporters during a conference call that the current course of action is to update the obsolete operational systems of Fannie and Freddie to provide some greater utility to the mortgage market.

While Democrats and Republicans alike have expressed their common agreement that Fannie and Freddie should be done away with, each group has a different vision of what should ultimately replace these enterprises. While DeMarco’s proposal gives a basic outline of the structure for the business, Congress will have the final say in what becomes of Fannie Mae and Freddie Mac.

Describing the FHFA plans for 2013, DeMarco conveyed to reporters that the new company will be organized as a joint operation that is co-owned by both Fannie Mae and Freddie Mac.

DeMarco stated that they anticipate that the company will not initiate any loan securitization during 2013, rather focusing on laying the foundation for the business and gathering a professional staff, with its own chief executive and board.

In its current state, Fannie Mae and Freddie Mac do not originate mortgage loans, instead purchasing mortgages and indirectly providing financing to banks and lenders as they either package these loans as securities to sell with a guarantee or manage themselves.

These two companies have aided in the creation and maintenance of a liquid mortgage market, the responsibility of maintenance will fall onto the new company.

Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.