The Mortgaged Dreams of Fannie Mae and Freddie Mac

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The longstanding argument whether to rent or to buy in the U.S., which was very recently touched upon in the Quizzle Wire, may’ve just been thrown a curve ball.

Fannie Mae and Freddie Mac, the nation’s two biggest mortgage buyers, were forced to delist from the New York Stock Exchange on June 16, because Fannie Mae’s share price fell below the $1/share required minimum. On June 18, Freddie closed at 40 cents/share while Fannie closed at 35 cents/share.

Meanwhile, the top three lenders doing business with Fannie and Freddie – JPMorgan Chase, Bank of America and Wells Fargo, are all sitting pretty on the big board. Well, maybe not pretty, but they are, however, still up there.

If you recall, Fannie Mae and Freddie Mac were taken over by the federal government in 2008, which means that for all intents and purposes they are currently owned by U.S. taxpayers. Since they’re not privately owned, the delisting from the NYSE won’t actually hurt the companies – only us taxpayers. So far, the two companies have cost taxpayers $145.9 billion with a final bill prediction standing mighty high at $389 billion, according to the Congressional Budget Office.

The Federal Housing Finance Agency, which has overseen both corporations these past two years, ordered the move.

In reality, Freddie and Fannie should have been delisted the minute they were taken over two years ago.  The government should have made no bones about who was paying the bills. Ultimately though, this just feels like the government placing a long and rather knowing feather in the cap of the credit crisis and housing bust; a final acknowledgement that, yes, the government and our money are the shoulders holding the housing market barely above water.

A Little Background on our Friends Fannie and Freddie

The Federal National Mortgage Association, known more commonly as Fannie Mae, was originally created as a federal agency under FDR’s New Deal in 1938 to do what it still does today – help make mortgages available for low-income families.  In 1968, Fannie Mae became a private shareholder-owned corporation, motivating the government in 1970 to charter The Federal Home Loan Mortgage Corporation, known as Freddie Mac, in an effort to foster competition between the two and to better bolster the market for mortgages and mortgage-backed securities.

American Dreams

What’s clear from the government’s desire to expand homeownership in the 20th century is the affirmation of its undying belief in capitalism, competition, and the American Dream of prosperity, success and (last but certainly not least) home ownership. “Go west young man, and grow up with the country” should now be more accurately read as “Buy a house young family, and hope for the best.”

Fear not, they’ll tell you, “At Fannie Mae, we are in the American Dream business.”

In hindsight, it seems almost inevitable that the American ideals of ownership, property and independence would play such a decisive role in the American Dream of home ownership. And anyone that wishes to own a home – no matter if it’s in virtue of aspirations based in American ideology – should be entitled to do so; and for over 200 years they have.

Nonetheless, the implications of Fannie and Freddie’s downfall, the U.S. taxpayer’s current stake in their livelihoods, compels us to ask some pressing questions: 1) When is a house not an advantageous investment for someone? Shouldn’t a prospective buyer know? 2) What can the government do to better reorganize and regulate the mortgage and lending industry? 3) For whom is homeownership more necessary? Homeowners in pursuit of the American dream or the economy?

I’m being snide with that last question.

Of course, the irony in all this is that the depressed housing market has seemingly made right now a perfect time to buy.

Bottom Line

American dream or not, homeownership is a vital element in personal and economic growth for both the homeowner and the country. But taxpayers should not be on the hook, no matter how dire our country’s economic situation is, for what the Treasury Department said would be unlimited financial support to Fannie Mae and Freddie Mac for the next three years.

So this isn’t about the subjective pros and cons of renting vs. buying (and there are plenty for both sides). It’s about a glaring $230 billion subsidized dollars committed to supporting home ownership as of a November, 2009 report. Subsidies and unlimited financial support sounds to me like the third new set of wheels on a car with a bad engine – how much financial sense does it truly make?

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