Possible end in sight for mortgage giants Fannie and Freddie

Timothy Geithner

Treasury Secretary Timothy Geithner is due to unveil some proposals concerning Freddie Mac and Fannie Mae soon. Image from Wikimedia Commons.

Mortgage backing companies Freddie Mac and Fannie Mae could become a thing of the past. An upcoming Treasury report will make proposals about what should be done with the two government sponsored enterprises. One proposal is to let them both go under.

Proposed cut of Freddie and Fannie would take years

The Department of the Treasury has several proposals about what to do with government sponsored mortgage insurance companies Fannie Mae and Freddie Mac, according to CNN. The mortgage backing companies were placed in conservatorship when the real estate market crashed. Since then, more than $150 billion in emergency loans was lent to Freddie and Fannie to keep the housing market afloat. The government has been trying to figure out what should be done with Freddie and Fannie. One proposal is to withdraw the government from the mortgage market altogether. However, that would mean that low cost loans for homes would likely become a thing of the past.

Other possibilities

Freddie and Fannie own or insure half of all mortgages in the United States, from Birmingham, Alabama, to Anchorage, Alaska. Phasing the mortgage houses out, according to Bloomberg, or other proposals will take time to implement. It is also rumored that the size of loans that the companies can insure will be reduced. Currently, only loans less than $729,500 can be backed by either company. It is also thought that Freddie and Fannie could be reduced to being mortgage backers of last resort.

Vital role in keeping mortgage costs low

Freddie Mac and Fannie Mae play a role in keeping risks and costs in the mortgage market low. The companies repackage mortgages as securities that are sold to investors and guarantee lenders and investors compensation if borrowers default. The goal is to make sure loan lenders are willing to lend by creating more lending capital and decreasing risks that lenders will lose money if borrowers default. If Freddie and Fannie are axed, the cost of mortgages could increase and make it difficult for anyone other than the wealthy to get a loan for purchasing a home.

Sources

CNN

Bloomberg

Other recent posts by bryanh