Wednesday, September 4, 2013

The Death Of Freddie and Fannie


Well, we're learning this week that Fannie Mae and Freddie Mac will be breathing their last in the next year or so.  Debt ridden, dazed, and without direction, Fannie and Freddie shows what can happen when big government is allowed to step in and corrupt something.  

Fannie Mae was born in 1938.  It began as a modest effort to expand home loans to a job-holding, taxpaying responsible middle class to participate in home ownership.  It served to keep banks honest and offered reasonable mortgage rates and fees to those who would otherwise be ignored by the banks and savings and loan companies.  For the next 30 years American home ownership went from 40% in 1940 to 66% in 1970 and over 96% of those loans were accounts in good standing.

Fannie served as a "secondary lender" which allowed banks to farm out their existing home loans to Fannie, which, in turn, freed up the thrift's mortgage portfolio in order to make fresh loans.  Freddie was Fannie's little brother and served the same beneficial mission of expanding home ownership to the middle class.

In 1968 both Fannie and Freddie got even better.  They were re-organized as separate, stand alone corporations, with the intent to keep over oppressive government and political corruption from infesting their organizations.  American investors bought shares in Fannie and Freddie and it operated for another thirty plus years with autonomy, free from the influence of politicians who might opt to employ the Fannie and Freddie largess to win votes.  Both Fannie and Freddie prospered so greatly that, for two decades, they were stock guru Peter Lynch's pick as the number 1 greatest investment stock holders could own.

Then, in 1999 Teflon Bill Clinton and Harry Reid and Nancy Pelosi and Charlie Rangel and Chris Dodd and Barney Frank  accused Fannie and Freddie of being racists.  They bemoaned the fact that Freddie and Fannie were making huge profits for the U.S. government and its investors but were not making loans to inner city Blacks and Hispanics in the Southwest.  Accordingly, Clinton and his Democratic cohorts drafted amendments to the Community Reinvestment Act that mandated that Freddie and Fanny increase their share of home loans to the poor, directing both agencies to set aside requirements for traditional down payments, good credit histories and verification of employment.

Less than a decade later both agencies were in financial ruin.  The first problem to emerge was the high rate of foreclosure activity, coming directly from the loan accounts belonging to minorities and those who were bad credit risks from the get go.  Then, the combination of rising foreclosures and rising short term interest rates, with an accompanying crash in home prices, expanded to those who overpaid for their homes and those investors heavily involved in "house flipping".  

These problems were just too much for Fannie and Freddie, as guarantor of millions of loans, to take on.  Both agencies began hemorrhaging cash by the billions.  And sadly, the American taxpayer became the debtor of last resort.

So what started out as a good idea, an idea strengthened by legislation that divorced their corporate life from government control, received their death sentence in 1999 when Bubba Clinton and his Fruitgum compatriots forced them to lend to the most risky of borrowers; people who didn't own bank accounts and conducted their financial business in the local pawn shop and swapping their food stamp cards with 7-11 for cash.

When Freddie and Fannie finally breathe their last we can expect another housing crash as the only source of home loans would be banks and thrifts who are more than happy to forego mortgage lending, and instead just take morning withdrawals from the Federal Reserve, at 0 percent interest, and buy ten year treasuries...all the while stamping "Not Approved" to even the best of prospective home buyers.  

Sad.  Damned Sad.


TheOldMan said...

The CRA came into being in 1977.

A Modest Scribler said...

Yes, oldman, and as i said in the blog, it was amended by Clinton and Congress in 1999...amended because the libs didn't feel it was loaning enough to minorities.