The recent changes in bailout agreements indicate that the Federal Government is now gearing up the process to end the era of mortgage giants Fannie Mae and Freddie Mac. But is it the right time? Is the US housing market ready to accept this and move on with the reform process to a new system? An analysis of why this is essential.
The United States government couldn’t have been clearer on this. The latest changes to the US Treasury bailout agreements with government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac clearly indicate that it’s just a matter of days when the official words will be out to wind them up; the process has started though. As per the changes made to the agreements, the mortgage finance giants have been asked to turn over all profits to the government and wind down their large investment portfolios at 15% per year rather than 10% as stated earlier. Result: The US government would soon take over all business controlled by the two GSEs for which it has been acting as the primary guarantor since both the institutions announced bankruptcy in 2008. The fact is that when the US government decided to continue the two agencies after bankruptcy, everyone knew that sooner or later they will be asked to shut their shops. They only existed because the government wanted them for reviving the distressed US housing market. Now, when the government looks decisive, the question remains, has the US housing market stabilised enough to say goodbye to Fannie and Freddie? It’s a point worth exploring besides understanding how the two mortgage giants have contributed to the overall US housing scenario.
The story of Fannie Mae is certainly interesting in this regard for the fact that it was commissioned in 1938 after the Great Depression provide the necessary impetus to the US housing market as a part of the New Deal (a series of economic programmes enacted in US between 1933 and 1936). Interestingly, it was this mortgage giant that ended up initiating the second biggest financial crisis ever. In fact, by the time Global Financial Crisis started (in the second quarter of 2008) Fannie Mae and Freddie Mac (the younger counter art of Fannie Mae was commissioned in 1970 to give competition to the former) had been exposed to subprime/Alt-A loans worth a mind-boggling $388 billion and $392 billion respectively. Certainly, considering that the annual Private-label Mortgage-backed Securities issuances remained at over $800 billion per year in 2005 and 2006, one cannot say that these GSEs caused the crisis, but they for sure were the biggest contributors. Perhaps this was what prompted Senator John McCain to say that “the catalyst for this housing crisis” was Fannie Mae and Freddie Mac. In one of the debates during the Presidential campaign in 2008, he had claimed that these two GSEs “caused the subprime lending situation that now caused the housing market in America to collapse.”
However, with the taxpayers owing close to 80% of the two GSEs post bankruptcy, the onus was on the government to use them to reorganise the US housing market. And as it can be seen, the job is done, at least to some extent. After long, the US housing market seems gaining legs. What is more interesting is the fact that now it’s in a situation where people have started looking forward to it as a growth driver. Agrees Celia Chen, West Chester based Senior Director at Moody’s Analytics, as she tells B&E, “Housing, once the Achilles’ heel of the US economy, is starting to look like a source of strength in a recovery that has lost its vigor and faces significant roadblocks. That housing is now a bright spot speaks more about the weakness of the recovery than absolute strength in housing.” This comes as a relief at a time when the other drivers of growth are faltering. Housing is about to turn from being a drag on the broader economy to being a driver.
The United States government couldn’t have been clearer on this. The latest changes to the US Treasury bailout agreements with government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac clearly indicate that it’s just a matter of days when the official words will be out to wind them up; the process has started though. As per the changes made to the agreements, the mortgage finance giants have been asked to turn over all profits to the government and wind down their large investment portfolios at 15% per year rather than 10% as stated earlier. Result: The US government would soon take over all business controlled by the two GSEs for which it has been acting as the primary guarantor since both the institutions announced bankruptcy in 2008. The fact is that when the US government decided to continue the two agencies after bankruptcy, everyone knew that sooner or later they will be asked to shut their shops. They only existed because the government wanted them for reviving the distressed US housing market. Now, when the government looks decisive, the question remains, has the US housing market stabilised enough to say goodbye to Fannie and Freddie? It’s a point worth exploring besides understanding how the two mortgage giants have contributed to the overall US housing scenario.
The story of Fannie Mae is certainly interesting in this regard for the fact that it was commissioned in 1938 after the Great Depression provide the necessary impetus to the US housing market as a part of the New Deal (a series of economic programmes enacted in US between 1933 and 1936). Interestingly, it was this mortgage giant that ended up initiating the second biggest financial crisis ever. In fact, by the time Global Financial Crisis started (in the second quarter of 2008) Fannie Mae and Freddie Mac (the younger counter art of Fannie Mae was commissioned in 1970 to give competition to the former) had been exposed to subprime/Alt-A loans worth a mind-boggling $388 billion and $392 billion respectively. Certainly, considering that the annual Private-label Mortgage-backed Securities issuances remained at over $800 billion per year in 2005 and 2006, one cannot say that these GSEs caused the crisis, but they for sure were the biggest contributors. Perhaps this was what prompted Senator John McCain to say that “the catalyst for this housing crisis” was Fannie Mae and Freddie Mac. In one of the debates during the Presidential campaign in 2008, he had claimed that these two GSEs “caused the subprime lending situation that now caused the housing market in America to collapse.”
However, with the taxpayers owing close to 80% of the two GSEs post bankruptcy, the onus was on the government to use them to reorganise the US housing market. And as it can be seen, the job is done, at least to some extent. After long, the US housing market seems gaining legs. What is more interesting is the fact that now it’s in a situation where people have started looking forward to it as a growth driver. Agrees Celia Chen, West Chester based Senior Director at Moody’s Analytics, as she tells B&E, “Housing, once the Achilles’ heel of the US economy, is starting to look like a source of strength in a recovery that has lost its vigor and faces significant roadblocks. That housing is now a bright spot speaks more about the weakness of the recovery than absolute strength in housing.” This comes as a relief at a time when the other drivers of growth are faltering. Housing is about to turn from being a drag on the broader economy to being a driver.
For More IIPM Info, Visit below mentioned IIPM articles
2012 : DNA National B-School Survey 2012
Ranked 1st in International Exposure (ahead of all the IIMs)
Ranked 6th Overall
Zee Business Best B-School Survey 2012
Prof. Arindam Chaudhuri’s Session at IMA Indore
IIPM IN FINANCIAL TIMES, UK. FEATURE OF THE WEEK
IIPM strong hold on Placement : 10000 Students Placed in last 5 year
IIPM’s Management Consulting Arm-Planman Consulting
Professor Arindam Chaudhuri – A Man For The Society….
IIPM: Indian Institute of Planning and Management
IIPM makes business education truly global
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM B-School Facebook Page
IIPM Global Exposure
IIPM Best B School India
IIPM B-School Detail
IIPM Links
IIPM : The B-School with a Human Face
Ranked 1st in International Exposure (ahead of all the IIMs)
Ranked 6th Overall
Zee Business Best B-School Survey 2012
Prof. Arindam Chaudhuri’s Session at IMA Indore
IIPM IN FINANCIAL TIMES, UK. FEATURE OF THE WEEK
IIPM strong hold on Placement : 10000 Students Placed in last 5 year
IIPM’s Management Consulting Arm-Planman Consulting
Professor Arindam Chaudhuri – A Man For The Society….
IIPM: Indian Institute of Planning and Management
IIPM makes business education truly global
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM B-School Facebook Page
IIPM Global Exposure
IIPM Best B School India
IIPM B-School Detail
IIPM Links
IIPM : The B-School with a Human Face
