Fannie Mae and Freddie Mac, while crucial to the U.S. mortgage market, have contributed to housing crises and affordability issues due to their reliance on government backing and risky lending practices, necessitating a reevaluation of their roles and the need for market accountability.
Government Influence on Mortgage Market
Fannie Mae and Freddie Mac, as government-sponsored enterprises, dominate the US mortgage market with trillions in assets and an implicit government guarantee, distorting market dynamics.
The US government guarantees 70-77% of the American mortgage market through Fannie Mae, Freddie Mac, and Ginnie Mae, creating an unprecedented level of market intervention.
These GSEs’ government backing allows them to expand debt and size enormously, becoming the most important actors in the US mortgage market.
Financial Implications
The government guarantee is 100% real and free, enabling Fannie Mae and Freddie Mac to access debt without paying interest, fueling their market dominance.
This guarantee allows GSEs to sell mortgage-backed securities worldwide as AAA bonds, despite potentially high-risk underlying loans.
Risk and Profit Distribution
The structure of Fannie Mae and Freddie Mac creates a system where profits are 100% private while risks are 99% public, exemplifying a problematic risk-reward imbalance.
This arrangement contributed to the housing bubble and crash, resulting in Fannie Mae and Freddie Mac’s stock prices plummeting 99% after the 2008 crisis.
Market Distortions
The government guarantee makes it easier for homeowners to get mortgages but simultaneously drives up housing prices and increases market vulnerability to crises.
These GSEs are popular with various economic interest groups, including home builders, real estate agents, and Wall Street firms, due to the guaranteed source of mortgage-backed securities.
Systemic Risk
The size and government backing of Fannie Mae and Freddie Mac make them “too big to fail”, posing significant systemic risk to the US economy.