At the depth of the recent “Great Recession,” when government-backed Fannie Mae and Freddie Mac, the major backstops of the U.S. home mortgage market, seemed headed for the trash heap of unparalleled extinction, the government had to step in to keep America’s massive mortgage market from total collapse.
To keep this unmitigated disaster from happening, it took a $187 billion U.S. Treasury infusion into a subsequent federal takeover to put these mortgage giants, established during FDR’s New Deal, from becoming a national catastrophe. In effect, it evolved these guarantors of 50% of America’s $10 trillion mortgage debt, but privately managed, into totally-owned bedrocks of the world’s dominant mortgage sector.
With a more judicious approach to the approval of loans by participating mortgage institutions, and the strengthening and demand of home sales, the recent rebound has been so encouraging as to indicate dividends of $131 billion to repay the blood-letting. This had obviously become a significant part of the near $1 trillion stimulus voted by Congress shortly after the accession of the Obama Administration in 2009. This has been in line with the steps taken to save the American International Group (AIG) insurance colossus, and General Motors, both of which are returning major paybacks to the U.S. Treasury.
While financial market optimists have rewarded the common and preferred equities of Fannie Mae and Freddie Mac with greatly enhanced values of both concerns as preferred stocks, the two mortgage-backed titans, relics of the Roosevelt era, are unlikely to be headed for a comeback. With both Houses of Congress particularly sensitive to the future federal liability to America’s recovering mortgage markets, there are negotiations underway in the House to set up a mortgage-backed federal agency, tentatively called the Federal Mortgage Insurance Co. to insure 90% of any qualifying mortgage-backed security issues; with private capital insurers taking the first 10% of any portfolio losses. This is in contrast with Fannie Mae and Freddie Mac insuring 100% of all mortgage losses, as was the case when the recent “Great Recession” enveloped the U.S. and other major world financial markets.
As is usual with Congress, the debates encompassing the final makeup of the emerging succeeding government agency will drag on past the politically charged mid-term elections. But what is almost 100% certain, the bell of Fannie Mae and Freddie Mac will toll shortly thereafter, signaling a new era of protection for future home burdens and owners; but it will be protecting U.S. taxpayers in general, with the eventual turbulence surrounding the machinations of housing-related mortgage debt in the future.
In effect, America’s future mortgage debt will carry part of the cost through increased mortgage rates once the final negotiations become law. But, in this case, the solution appears an improvement to the “time-bomb” laden risks that were carried with the workings of Fannie Mae and Freddie Mac, since their inception.
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