Archives for May 2014

REPLACING FANNIE MAE: CRAPO

Congress was to decide about replacing Fannie Mae; however Senate Banking Committee members again could not agree on anything.   Proposed legislation, by Crapo of Idaho, was to replace Fannie Mae over five years with federal insurance for mortgage bonds. Under the proposed legislation current shareholders of Fannie Mae would be in line behind the U.S. in getting any compensation from the winding down of Fannie Mae.

Fannie Mae buys mortgages from lenders and packages them into securities on which they guarantee payments of principal and interest.  Fannie Mae now backs about two-thirds of new home loans.  As the housing market rebounds, Fannie Mae rebounds, now recording record profits of $84 billion for 2013.

Restructuring the mortgage market is the largest piece of unfinished business from the 2008 crisis.  You may recall that was when the government seized control of Fannie Mae as it was going insolvent.

An impasse between Democrats and Republications leaves Fannie Mae operating indefinitely under federal control and prevents the replacing of Fannie Mae.  So, as of late April, the U.S. Senate Banking Committee delayed indefinitely the bill to replace Fannie Mae.  The result is that efforts to fix the housing finance system will have to start over in 2015.

This status quo is nationalization of the entire mortgage industry.    This is no accident but an intentional government policy decision.   This certainly benefits the shareholders of Fannie Mae who while the market rebounds; they will continue to see the benefits of the billions in profits.  Yet at the same time there may be an unintended result to future first-time borrowers with higher mortgage rates.  Tougher credit standards and increase property prices shut out increasing numbers of first-time home buyers.  First-time buyers accounted for 26 percent of purchases in January 2014, down from 30 percent in 2013.

Senate Republicans’ proposal sought to bring more buyers into the market by creating affordable housing funds.    So, replacing Fannie Mae, what a joke.