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Treasury unveils plan to privatize Fannie Mae and Freddie Mac

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Treasury has unveiled a plan to privatize Fannie Mae and Freddie Mac, the two giant mortgage finance companies. They nearly dropped in the financial crisis 11 years ago and were bailed out at a total cost to taxpayers of $187 billion.

President Donald Trump’s administration on Thursday published a sweeping plan that could renovate the U.S. housing market, beginning with ending more than a decade of government control of Fannie Mae and Freddie Mac, which back half of the nation’s mortgages.

The long-awaited plan from the Treasury Department features about 50 proposals, including many technical innovations to financial management, and is aimed at shrinking the government’s role in the housing market.
The foundation of the plan would resolve the fates of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, that 11 years ago this week were put into government conservatorship through the global financial crisis.

Fannie Mae and Freddie Mac, acting under so-called government conservatorships, have become successful again in the years since the 2008 release and have repaid their bailouts in full to the Treasury.

The administration originally seemed to Congress for legislation to overhaul the housing finance system and return the companies to private shareholders. However, Congress hasn’t acted, and now officials say they will take administrative effort for the core change, finishing the Fannie and Freddie conservatorships.

This plan will “protect taxpayers and help Americans who want to buy a home,” Treasury Secretary Steven Mnuchin stated in a declaration. “An effective and efficient federal housing finance system will also meaningfully contribute to the continued economic growth under this administration.”

The administration’s plan asks for returning Fannie Mae and Freddie Mac to individual ownership and decreasing chance to taxpayers. That while protecting homebuyers’ access to 30-year, fixed-rate mortgages, a pillar of housing finance. The Treasury Department announced the plan Thursday and offered it to President Donald Trump, who called for it in March.

Although not prominently in the public eye, the two companies play a crucial role in the housing market. Commonly they guarantee about half of the $10 trillion U.S. home loan market.

The housing giants back half the America’s mortgages, and housing experts have warned that allowing them too much independence again could lead to higher mortgage costs for buyers while enriching Wall Street investors.

plan to privatize Fannie Mae and Freddie Mac, mortgage finance companies
Image: ERA Landmark Real Estate

Fannie Mae and Freddie Mac serve the last major unresolved business from the financial crisis, and Mnuchin has called them a top priority for more than two years. Under the plan, they would be turned back into private companies but would be required to pay taxpayers a fee for government protection. It would also open the market up to competitors for the first time.

What are Fannie Mae and Freddie Mac and what do they do?

Before the Great Depression of the 1930s, funding for mortgages was largely given by life insurance companies, banks, and thrifts, with the limited government back up. Fannie was built in 1938 to buy loans issued by the Federal Housing Administration. Freddie was created in 1989.

They are called government-sponsored programs. Before they were taken over in 2008, they were private companies but still enjoyed a certain guarantee that the government would step in and rescue them if they failed. That’s what occurred after the failure of the housing market and the wave of mortgage defaults.

These companies don’t make home loans. They buy them from banks and other moneylenders, and bundle them into agreements, guarantee them against default and sell them to investors. Because the companies are under government control, investors are anxious to snap up the “safe” securities.

Fannie Mae and Freddie Mac realize the last major unresolved company from the financial crisis, and Mnuchin has asked them a top priority for more than two years. Based on the plan, they would be turned back into private companies but would be expected to pay taxpayers a fee for government protection. It would also open the market up to competitors for the first time.

While Democrats and Republicans support ending government control of the companies, several other plans have stalled in Congress. President Barack Obama’s administration shied away from the subject, afraid that a wrong move could disturb the housing market and the availability of 30-year mortgages.

A senior Treasury Department official said that while the administration’s plan was extensive, the changes are designed to be “incremental and realistic.”

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