Fannie, Freddie: Roles in Containing Repossessed Houses

Mortgage enterprises Freddie Mac and Fannie Mae were not included in the proposed revamp of financial sector regulation because of the current roles of Freddie Mac and Fannie Mae in the containment of the effects of repossessed houses.

President Obama said that his administration will release its recommendations concerning Freddie Mac and Fannie Mae next year, after putting in place a better system to regulate the financial industry. The financial sector is largely blamed for the flood of repossessed houses that battered the housing market and ultimately the national economy.

The president said that the Department of Housing and Urban Development and the Treasury Department will gather proposals from the citizenry and other government departments concerning the future roles of Freddie Mac, Fannie Mae and the entire Federal Home Loan Bank system.

Although Freddie Mac and Fannie Mae incurred huge losses and had to be rescued with government funds last year, the two government-sponsored enterprises helped in containing the problem of large numbers of repossessed houses.

When Federal Reserve bought $500 billion mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, mortgage rates started to drop to their lowest levels in many years, allowing many distressed homeowners to refinance their costly mortgage loans to prevent them from becoming repossessed houses.

The Fed’s program of buying securities to maintain mortgage rates at low levels was enlarged in March when the Fed increased its mortgages, which are backed by securities, acquisition to $1.25 trillion.

The president said that it needs to keep Fannie Mae and Freddie Mac under government control for a time because investors are not acquiring mortgages, which are backed by securities, that are not guaranteed by the two GSEs.

Ginnie Mae, on the other hand, has always been government owned. It was created to back mortgage-backed securities guaranteed by the Department of Veterans Affairs and the Federal Housing Administration.

Among the options being considered by the Obama administration for Freddie Mac and Fannie Mae is their return to their former status as private entities earning profits in the home ownership sector, liquidation of their assets, and conversion into corporations that will insure covered bonds.

The two GSEs are also being considered for operation similar to the public utility system, with the federal government controlling their profit margins and establishing guarantee limits.

Lastly, the GSEs are also being considered for incorporation into another agency, such as the HUD. Whichever of these options is chosen, analysts hope that they will still help contribute to the mitigation of the effects of the avalanche of repossessed houses.

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