By Christopher Raby
The Daily Record Newswire
With the Republican takeover of the House of Representatives during last week’s mid-term elections, Financial Services Committee Chairman Barney Frank, D-Mass., likely will cede the committee chairmanship to Rep. Spencer Bachus, R-Ala.
One consequence of the power shift will be the fate of Fannie Mae and Freddie Mac; long lamented by House Republicans. Prior to the election, Democrats had been in control of the fates of Fannie Mae and Freddie Mac. Now that Republicans have control of the House, their future certainly is not bright.
Originally founded during the Great Depression, Fannie Mae became a government sponsored enterprise in the late 1960s. The organization’s primary intent was to securitize mortgages in the secondary mortgage market, allowing lenders to reinvest proceeds into additional lending.
Although set up to buy Federal Housing Administration-insured mortgages, in 1970 the government granted Fannie Mae the ability to buy private, non-FHA insured mortgages. At the same time, Freddie Mac was set up to elicit competition to Fannie Mae and create a more active secondary mortgage market.
The late 1990s saw revised ratio requirements and less stringent credit requirements on the mortgages Fannie Mae was willing to purchase. That allowed institutions in the primary mortgage market to make loans to subprime borrowers at interest rates higher than conventional loans with complicated features such as teaser rates, interest-only and negative amortization loans.
Quoted in 2003, Barney Frank, then the ranking Democrat on the Financial Services Committee and a strong advocate of Fannie Mae, said: “These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis.”
In 2008, Fannie and Freddie were placed into conservatorship in one of the most sweeping government interventions into the private financial markets. In conservatorship, an external entity takes legal control of an organization, often with the intent to restructure or liquidate it.
The current debate largely centers on the continued existence of Fannie Mae and Freddie Mac, and what sort of entity should follow any possible dissolution. Democrats have lamented the end of Fannie and Freddie; however, even Frank has acknowledged recently that they likely need to go. Democrats have delayed action, given that the companies are still functioning and ensuring sure families are approved for mortgage loans. The Obama administration has pushed to replace Fannie and Freddie with a new form of federal subsidy.
Conversely, House Republicans want a separation of the federal government and Fannie Mae and Freddie Mac. Bachus has thrown his support behind new legislation that would require the government to dissolve Fannie Mae and Freddie Mac immediately. Republicans do not want any additional form of government involvement in the mortgage industry to follow the Fannie and Freddie’s dissolution.
Given the election results, Republicans and Democrats alike must compromise on their stances or reform likely will be inevitably delayed.
Given the disparity of opinions, the prospect of any major mortgage industry reform could take years.
Christopher Raby is an analyst/portfolio manager for Karpus Investment Management and can be contacted at (585) 586-4680.
